What's it all about? A glossary of trust terms

Baffled by Oeics and PEPs and hazy about exit charges? Neil Baker explains the jargon
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The Independent Online
Annual charge. The annual fee of between 0.5 per cent and 2 per cent charged on your unit trust investment to cover the cost of fund management and administration.

Bid/offer spread. Each unit trust has two quoted prices. If you are selling, you get the bid price. If you are buying, you pay the offer price. The difference between the two is the bid/offer spread.

Creation price. The highest possible buying price for your units under Securities and Investment Board regulations. The actual offer price is slightly lower. The lowest possible valuation of your units on any one day is called the cancellation price.

Discount. When the market value of an investment trust share is less than the net asset value per share, the trust is trading at a discount. When the opposite is the case, the trust is trading at a premium.

Exit charges. Instead of levying a charge when you set up your investment, some unit trust companies make a charge if you cash in your investment within a specified time period.

Fully invested. Sometimes investment trusts will hold money in cash. When all the money has been put into investments, the trust is fully invested.

Gearing. If they see an opportunity, investment trust managers can borrow money to boost the amount they have at their disposal in the expectation that the extra returns they will make for shareholders will be greater than the cost of borrowing the money. This is known as gearing.

Investment trusts. A trust company that makes a profit by buying shares in other companies. The trust's own shares are traded on the stock market and their value is determined by the number of buyers and sellers, not the value of the underlying investments.

Limited life trust. An investment trust that has a fixed date on which it may be wound up.

Monthly income scheme. This is a facility to withdraw a fixed amount from a unit trust each month. If the trust does not produce sufficient interest or dividend payments to provide the specified income, some of your units may be sold to make up the difference. That would reduce your capital.

Net asset value. This is the net worth of a trust company's equity capital, usually expressed in pence per share.

Oeics. Pronounced oiks. Not unruly schoolboys but Open Ended Investment Companies. These are a new style of investment fund, similar to unit trusts and common in other European countries. They go on sale in the UK in January and could take over from unit trusts in time.

PEP. A personal equity plan is a tax-efficient way of investing in a unit trust or investment trust. Both dividends and capital growth are tax-free. You can invest up to pounds 6,000 each year in qualifying funds and a further pounds 1,500 in non-qualifying funds (see below).

Qualifying fund. A unit trust or investment trust that invests 50 per cent of its assets in the UK or European member states is a qualifying fund for PEP purposes. That means you can invest your full pounds 6,000 annual PEP allowance. A fund that invests less than 50 per cent in these areas is non-qualifying.

Reinvestment of dividends. When they produce "total return" performance figures, fund managers assume that any dividends paid out are used to buy more shares or units. This used to be difficult in practice with investment trusts but regular savings plans have made reinvestment easier.

Split capital trust. A trust company with two classes of share. One receives income and a predetermined capital value when the trust is liquidated. The other receives little or no income but is entitled to all the remaining assets of the trust when it is wound up.

Tracker fund. A unit trust that invests in all the companies that make a particular stock market index - the FT-SE 100 index, for example - so as to track the movements of the index.

Unit trust. The most popular form of pooled investment. Unlike an investment trust, the value of the units you hold is determined by the value of the underlying investment.

Warrants. Transferable certificates that give the holder the right to buy investment trust shares at a fixed price in the future. They give the buyer an option to receive an interest in the future equity of the fund for a small initial investment.

Yield. This is the dividend return on an investment, which is usually expressed as a percentage of the purchase price. Yields are quoted gross, before any tax is deducted, and the actual method of calculation can vary.

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