Introduction
When you open a Stocks and Shares ISA or a personal pension, you are faced with a bewildering array of fund choices. Terms like OEIC, unit trust, ETF, investment trust, active, passive, tracker, and index fund get thrown around. This guide provides an in-depth comparison of the most common investment fund types available to UK investors. It explains how each works, their cost structures, tax implications, and which situations each suits best. By the end, you will be able to look at a fund name and understand what you are buying.
Based on rules as of February 2026. Always verify current rates with official sources.
Open-Ended vs Closed-Ended Funds
Before comparing specific fund types, understand the fundamental distinction: open-ended versus closed-ended.
Open-ended funds (OEICs, unit trusts, ETFs with creation/redemption): The fund issues new units or cancels existing units based on investor demand. When you buy, the fund grows. When you sell, the fund shrinks. The price you pay is based on the net asset value (NAV) of the underlying assets. There is no limit on the fund’s size.
Closed-ended funds (investment trusts): The fund issues a fixed number of shares at launch (or through subsequent rights issues). Shares trade on a stock exchange, and their price is determined by supply and demand – not just NAV. Investment trusts can trade at a discount (price below NAV) or premium (price above NAV).
Why this matters: Open-ended funds always reflect the value of the underlying assets. Closed-ended funds can offer buying opportunities (discounts) but also carry the risk of buying at a premium.
OEICs (Open-Ended Investment Companies) and Unit Trusts
OEICs and unit trusts are the most common types of retail investment funds in the UK. They are very similar – OEICs are a newer structure, but for most investors, the differences are negligible.
How they work: A fund manager pools money from thousands of investors and buys a portfolio of assets (shares, bonds, property, etc.). Each investor owns a number of “units” or “shares” in the fund. The price per unit is calculated once per day (typically at noon) based on the NAV of the portfolio.
Key features:
- Daily pricing – You buy and sell at the NAV price, no bid-offer spread (or a very small one).
- Liquidity – You can typically sell units on any business day, though settlement takes 2–4 days.
- Costs – Annual management charge (AMC) typically 0.3% to 1.5% plus underlying fund expenses (total expense ratio or TER).
- Minimum investment – Often £500 lump sum or £50 monthly.
Active vs passive OEICs:
- Active OEICs – A manager tries to beat the market by picking winners. Higher fees (0.75–1.5%).
- Passive OEICs (index trackers) – The fund simply replicates an index (e.g., FTSE 100, S&P 500). Lower fees (0.1–0.5%).
Best for: Most retail investors, especially beginners. Easy to buy and sell, wide range of options, available on all major investment platforms.
ETFs (Exchange-Traded Funds)
ETFs are similar to OEICs but trade on a stock exchange like a share. You buy and sell ETF shares throughout the trading day at market prices.
How they differ from OEICs:
- Intraday trading – You can buy at 10:00am and sell at 2:00pm the same day. OEICs price once daily.
- Bid-offer spread – ETFs have a spread (difference between buy and sell price). For large, liquid ETFs (e.g., S&P 500 tracker), the spread is tiny (0.01–0.05%). For niche ETFs, it can be larger.
- Broker commission – Most platforms charge a trading fee for ETFs (£5–£15 per trade). OEICs are often commission-free.
- Ongoing charges – ETFs typically have lower ongoing charges than OEICs, especially for passive strategies (0.05–0.30%).
Types of ETFs:
- Physical ETFs – Actually hold the underlying assets (shares or bonds).
- Synthetic ETFs – Use derivatives to replicate index returns. Carry counterparty risk. Less common in Europe since new regulations.
Best for: Investors who want intraday liquidity, very low costs for passive strategies, or access to niche markets (commodities, specific sectors). Not ideal for regular monthly investing (trading fees add up).
Investment Trusts
Investment trusts are closed-ended funds listed on the London Stock Exchange. Unlike OEICs, they have a fixed number of shares.
Key features:
- Discounts and premiums – Investment trusts often trade at a discount to NAV (e.g., 10% discount means you buy £100 of assets for £90). Discounts can persist for years. They can also trade at a premium (rare).
- Gearing (borrowing) – Investment trusts can borrow money to invest more. This amplifies returns in rising markets and losses in falling markets. Most OEICs cannot gear.
- Dividend smoothing – Investment trusts can retain up to 15% of their income in good years and pay it out in lean years, providing a smoother dividend stream.
- Board of directors – Independent directors oversee the fund manager, potentially aligning interests better.
Costs: Ongoing charges typically 0.5–1.2% – similar to active OEICs. Plus the impact of the discount/premium.
Best for: Experienced investors comfortable with discounts, gearing, and trading on an exchange. Can offer value when buying at a discount.
Active vs Passive (Tracker) Funds
This is the most important decision you will make. It is not about fund structure (OEIC vs ETF) but about investment philosophy.
Active funds: A manager (or team) researches companies and decides which to buy and sell, aiming to beat a benchmark index (e.g., FTSE 100). They charge higher fees (0.75–1.5%) to pay for research and active trading.
Passive (tracker) funds: The fund simply replicates an index. No research, no stock-picking. Fees are much lower (0.05–0.30%).
Evidence: Decades of research show that the majority of active funds fail to beat their benchmark after fees, especially over long periods (10+ years). For example, over 15 years, about 85% of actively managed UK equity funds underperformed the FTSE All-Share index.
Why active funds persist:
- Some managers do beat the market (but past performance does not guarantee future results).
- Investors chase recent winners (performance chasing).
- Marketing and sales efforts.
Recommendation for most investors: Start with low-cost passive trackers. If you want to experiment with active funds, limit them to 10–20% of your portfolio and only after you understand why you believe the manager has an edge.
Fund of Funds vs Single Strategy Funds
Fund of funds (multi-manager funds): A fund that invests in other funds. This provides instant diversification across managers and asset classes. However, fees stack: you pay the fund-of-funds fee plus the underlying fund fees. Total costs can be 1.5–2.5% – very high.
Single strategy funds: The fund invests directly in assets (shares, bonds). You pay only one layer of fees.
Best for: Fund of funds may suit beginners who want a complete portfolio in one product and are willing to pay for convenience. For most investors, buying 2–3 low-cost single strategy funds (e.g., a global equity tracker and a bond fund) is cheaper and more transparent.
UK-Specific Fund Types
UK Equity Income funds: Invest in UK shares with above-average dividend yields. Popular with retirees seeking income. Can be active or passive.
Corporate bond funds: Invest in bonds issued by companies. Higher risk than government bonds, higher potential return.
Gilts (government bond funds): Invest in UK government bonds. Very low credit risk but interest rate risk.
Property funds: Invest in commercial property (offices, retail, industrial). Open-ended property funds can suspend redemptions during market stress (as happened after the 2016 Brexit referendum and 2020 pandemic). Investment trust property funds (closed-ended) do not suspend, but their share price can fall to a deep discount.
Money market funds: Invest in very short-term debt (treasury bills, commercial paper). Low risk, low return. Used as a cash alternative.
Comparing Costs: TER, OCF, and Platform Fees
Understanding costs is essential. Small differences in fees compound into large differences over decades.
Ongoing Charges Figure (OCF) / Total Expense Ratio (TER): The annual cost of running the fund, including management fees, admin, and other expenses. Does not include platform fees or trading costs.
Platform fee: The fee charged by your broker or ISA provider for holding the fund. Typically 0.15–0.45% per year or a flat fee (£5–£10 per month).
Example of total cost: A passive global equity ETF with OCF 0.15% held on a platform charging 0.25% = total 0.40% per year. An active UK equity fund with OCF 0.90% on the same platform = 1.15% per year. Over 30 years, assuming 5% returns, a £10,000 investment grows to:
- With 0.40% costs: £10,000 × (1.05 – 0.004)^30 = approx £38,000
- With 1.15% costs: £10,000 × (1.05 – 0.0115)^30 = approx £28,000
The higher costs consume £10,000 – a third of the final value.
How to Choose a Fund in Practice
Step 1: Decide active vs passive. For most, passive is the starting point.
Step 2: Decide asset class (equities, bonds, property, etc.). Global equities are a common core.
Step 3: Choose a benchmark. For global equities, common benchmarks include FTSE All-World, MSCI World, or S&P 500 (US only – less diversified).
Step 4: Compare OCF/TER across funds tracking the same benchmark. The lowest-cost tracker from a reputable provider is typically the best choice.
Step 5: Check fund size. Very small funds (under £50 million) may close, forcing you to sell at an inconvenient time.
Step 6: Choose your wrapper (ISA, pension, general account) based on tax efficiency.
Key Takeaways
- OEICs and unit trusts are the standard open-ended funds – easy to buy, daily pricing.
- ETFs trade on exchanges – lower costs for passive strategies, but pay trading commissions.
- Investment trusts are closed-ended – can trade at discounts, may use gearing, suitable for experienced investors.
- Passive (tracker) funds have lower fees and outperform most active funds over the long term.
- Costs matter enormously – a 1% higher annual fee can consume a third of your returns over 30 years.
- Start with a low-cost global equity tracker – it is the simplest, most diversified starting point.
This article is for general information and educational purposes only. It does not constitute financial advice. Tax rules, allowances, and product terms may change. Always check with HMRC or an FCA-authorised adviser for your personal circumstances.