Unit trusts
Unit trusts and Oeics are simple and straightforward. They offer a wide range of investment opportunities and can nearly always be bought with or without an ISA wrapper.

They are run by investment managers, banks, building societies, insurance companies, and direct sell financial operations such as Virgin Direct and Marks & Spencer Financial Services.

These pool money from many small investors and invest it in a range of company shares or fixed interest bonds. They give you a stake in 70 or 80 companies, looked after by a fund manager making decisions on your behalf.

• When you invest you buy units, the price of which varies with the value of the underlying investments. The managers can vary the number of units in issue to meet demand.
• There are usually two prices: a buying price and a lower selling price, set once a day. The buying price generally includes any charge made when you first invest.
• There is an annual management charge, typically between 0.5 and 1.5 per cent of the value of your investment.
• Minimum investment is typically £500 or £1,000 lump sum or £20 to £50 a month.
• You can sell at any time.

Open-ended investment companies (Oeics)
These work in the same way as unit trusts, pooling the money of small investors, but they have a different legal structure.

• They are companies, rather than trusts, so you buy shares instead of units. The managers can vary the number of shares in issue to meet demand.
• There is just one price, which moves up and down with the value of the underlying investments. The price is usually set once a day, and does not include any charge made for buying, which is quoted separately.
• As with unit trusts, there is an annual management charge usually set at 0.5 to 1.5 per cent, and the minimum investment levels are also the same.
• You can sell at any time.

Most unit trust managers are members of the Association of Unit Trust and Investment Funds (Autif), the trade association for the industry.

They are regulated by the Financial Services Authority (FSA), the City watchdog. Any complaints you have about a unit trust or oeic that cannot be resolved with the company concerned can be referred to the FSA Ombudsman.

Investment trusts
Investment trusts are quoted stock market companies that pool the money of small investors and invest it in other shares. They offer a very wide choice of investment opportunities and can usually be bought with or without an ISA wrapper.

They are companies in their own right, with independent boards that contract out investment management either to independent managers or to big investment management houses. The board can sack the managers if it is unhappy with the service they are providing.

How they work

• You buy shares, which are traded on the stock market in the same way as the shares of any other quoted company.
• The managers cannot vary the number of shares in issue to meet demand, so the price of shares depends on whether people are buying or selling them, as well as on the value of the underlying assets.
• The share price may be higher or lower than the value of the underlying investments, so you either pay a premium for the trust or buy it at a discount. Most trusts usually stand at a discount, with the average discount over the last few years typically around 15 per cent, although this has reduced recently.
• The price does not include any buying charges, and is updated throughout the trading day.
• The minimum investment is usually £250 to £1,000 for a lump sum or £25 to £50 a month. You can usually buy direct from the provider, or via a stockbroker.
• If you buy direct from the provider there may be a small initial charge. If you buy on the stock market you don't have to pay the initial charge, but you will incur dealing costs and stamp duty.
• Annual charges for mainstream funds range from 0.1 per cent up to 1.5 per cent. Specialist funds may charge more.
• There are often extra charges if you want to invest through an ISA.

How do they compare with unit trusts?
Investment trusts are not as widely used as unit trusts, largely because they are not as heavily advertised and do not generally pay commission to advisers. But they are often a valid alternative. The most important differences are:

• Investment trusts are generally lower cost than unit trusts and oeics, with the biggest trusts being the cheapest thanks to economies of scale.
• They are also generally higher risk. This is mainly because of the discount, which works in your favour if it narrows after you have bought, but will cut returns if it widens.