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What is an Open Ended Investment Company?

Everyone wants to make their money work for them, but if you’re too busy to look at charts during the day every day, or simply don’t know what they mean, OEICs might be the solution you’re looking for. 

These professionally managed investment funds offer a convenient and diversified path to potential growth. They are very similar to mutual funds. In this guide, we’ll break down everything you need to know about OEICs, with a special focus on the Indian market.

What are OEICs?

OEIC stands for Open-Ended Investment Company. It’s a type of collective investment fund that pools money from many investors. Following the fund raise, these companies hire expert investment managers and finance professionals to diversify and put your money to work.

Most times, this pooled money is invested in a diversified portfolio of assets like stocks, bonds, or real estate, based on a number of things. For instance, a retirement fund or a pension fund would be wary of investing in risky assets like small cap stocks or cryptocurrencies, but a growth fund wouldn’t.

The unique selling proposition of OEICs is that they’re professionally managed by investment experts, who not only care about diversification but also about return rates and the risk tolerance of their investors. This is very challenging to achieve individually, but much easier with a lot of money.

How do OEICs work?

OEICs work in a specific structure that not only ensures investors some sense of security in the institution, but also gives managers some wiggle room with respect to investments.

  • Open-ended structure – When you invest in an OEIC, the fund issues and redeems shares directly to investors, without a fixed number of shares. When you invest, you buy new shares from the OEIC and when you want to withdraw your investment, the OEIC redeems (buys back) your shares and you get your money back.
  • Priced on NAV – OEIC shares are priced once daily based on the Net Asset Value (NAV) of the fund’s underlying investments.

    Note: The NAV is a metric that’s computed by the fund to price every unit of share they sell to people who invest in their fund. At the end of the trading day, managers of an OEIC compute the closing price of all the securities within their portfolio, add the value of any additional assets, account for liabilities, and calculate NAV based on the number of outstanding shares.
  • Investor returns – There are two main ways you make money from investing in an OEIC: capital appreciation and/or dividends. When the NAV of the fund increases after a certain time period, you make capital returns. Additionally, when the stocks that the fund holds issue dividends, you also make a cut.

Investing in OEICs

If you’re a resident of India, OEICs are very similar to mutual funds. They collect your money under one head, invest it according to their mandate (which you can read online on their website) and return either the NAV capital appreciation to you, or the dividends, or both.

Investing in an OEIC (or a mutual fund) is as easy as it can be. There are several apps in the Indian market that let you transfer money from your bank account to their app accounts through UPI or net banking.

When you choose a mutual fund provider, make sure that you’re investing in companies that you trust and those that are regulated and approved by the SEBI.

There are two ways in which you can invest in OEICs:

  • Lump-sum investment – You could deposit one large sum of money in the fund altogether and receive the market price of the NAV. This is usually preferable when the market is performing poorly and you do not want to be invested only in cash.
  • Systematic Investment Plans (SIPs) – Through SIPs, you can set up a mandate on a UPI app or your bank account that automatically invests a certain sum of money to the fund on a certain date every month. SIPs are preferable when you don’t want to think about making investments all the time, and prefer that they happen passively and automatically.

Frequently Asked Questions

What are some costs of investing in OEICs?

There are several costs when investing in an OEIC.
Expense ratio – This is the fee that the fund management deducts from your funds to cover their administrative and operational expenses. Actively managed funds typically have higher expense ratios than passively managed ones simply because they require more work.
Exit loads – These are fees that are charged when you either buy into or close out your positions in the fund. Front-end load is when you pay a commission when investing, and back-end load is a commission you pay when you sell your shares.

What are some different types of OEIC funds that exist?

Here are some types of funds you could explore:
Equity Funds: Invest primarily in stocks.
Debt Funds: Invest in fixed-income securities like bonds.
Hybrid Funds: Combine stocks and bonds.
Index Funds: Passively track a market index (e.g., Sensex, Nifty).
Liquid Funds: Invest in highly liquid short-term investments.
Tax-Saving Funds (ELSS): Offer tax benefits.

Are OEICs risky?

OEICs offer diversification, but inherent market risk always remains. Make sure that you carefully assess your risk tolerance, and the fund’s historical returns before investing.

Can I lose money in an OEIC?

Yes, definitely. Even if you’re investing in an OEIC, you’re technically still investing your money in the stock market. That carries inherent risks, and in case of a market crash, you will lose money as well.

Are OEICs good for short-term investments?

Generally, OEICs are suitable for medium to long-term goals due to potential market volatility in the short term. There are also fees involved for investing in OEICs which are generally higher in the shorter term. Hence, if you’re looking to invest in the short-term, it is better to do that in stocks directly.

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