An Irish Times guide to the world of personal finance

UNIT FUNDS

Can you please explain to a novice what the above are and what the difference between the gross variety and the net variety is? Ninety-nine per cent of the entries for the gross funds have an identical Buy price and Sell price, while only 2 per cent of the net funds exhibit this property. What is the choice between the two kinds? Ark, Eagle, Irish Life, New Ireland, Ulster e.t.c. are all listed in both lists. What is it all about and why is it worth a full page of Saturday's Irish Times?

Mr D.O'K., Galway

Unitised funds are financial instruments in which investors buy a share in order to spread their investment more widely than they might by directly investing in the markets. They get their name by their divisions, units. The investor buys a unit of the fund at a price determined by the fund's value divided by the number of units, or shares, it contains. Another advantage, particularly for the less-experienced investor, is that professionals manage the funds. Broadly, funds can be managed actively or passively - the latter contain the increasingly common tracker funds designed to replicate the performance of a particular stock market index.

Turning to gross and net funds, the difference is a question of tax and history. Until recent years, all funds available to Irish domestic investors were net funds. That meant tax was paid from the funds on the growth within that particular fund to the Exchequer each year by the fund manager on behalf of the individual investors. This cut the amount available going forward in your investment.

Finance Minister Mr McCreevy changed the rules at the beginning of 2001 to bring the Republic in line with common practice in most jurisdictions, with the exception of Britain, and in line with funds being sold from the Republic to offshore investors. The change under the new gross funds was that no tax was paid to the Revenue during the investment.

All the money in the fund and the money added to it through return on investment each year went forward to successive years. In practice, this should improve the fund's return. The Revenue taxes the fund when it matures, or the individual decides to withdraw the investment.

By way of compensation for forgoing their annual tax take, the Revenue charges a rate equal to the basic rate of tax (currently 20 per cent) plus three percentage points. They were open to this change presumably because they hope to gain by taxing a larger end sum than they would by chipping away at the fund on an annual basis. Any new funds since Mr McCreevy changed the rules must conform to the "gross roll-up" design that gives the gross funds their name. The net funds are still trading but no new ones can be set up. That is why the same institutions' names appear in both lists.

On why the buy and sell prices are identical in gross funds and not in net ones, the answer is simply that financial institutions have altered the way they charge for these funds. I am not sure it is universal but most providers seem to have abandoned the buy/sell spread that saw them profit on each transaction in any unit fund. They have instead adjusted their annual management charges and entry fees to offset any income loss.

On the space they take up, unit funds, in one form or another, are among the most common investment option for individuals, whether in pensions, life assurance or otherwise. As such, there is a lot of interest in their performance and, as a reader service, The Irish Times prints the full list of domestic funds weekly - on a Friday by the way (page 4 of the supplement) not a Saturday.

EIRCOM

Can you explain how an Eircom shareholder (sufferer) works out their loss on their investment for the tax year to 31/12/01? This is someone who is in at the issue price, got the free shares, never sold anything, accepted the Valentia offer and now holds Vodafone shares. The loss may be required as an offset this year (hopefully) or in future years. Also, what is the locked-in value of the Vodafone shares?

Mr G.C., e-mail

There have been a number of similar queries recently that were relegated by the flood of SSIA-related inquiries. At the time of the share split - when Vodafone bought Eircell - the Revenue eventually determined a new base price for each part of the demerged firm. What was left of Eircom was then bought by Valentia and valued at €1.11 per share, around 43 per cent of the combined price with Eircell being given a base price of €1.45406, around 57 per cent. I say "around" regarding the percentages. These are rounded figures and should not be used as a short cut for assessing your capital loss. To assess the loss on the Eircom portion of the original €3.90 per share price following acceptance of the Valentia offer, the following formula - [3.90 x 1.11 (1.11 + 1.45406)] - shows the Eircom portion of the original share was worth €1.69 post-split. Given that Valentia paid €1.335 per share, not including the three cent dividend per share the consortium included in the overall price, the loss per share is €1.69 minus €1.335, which equals 35.5 cents per share. So, for the part of Eircom bought by Valentia, you have a loss of 35.5 cents for every one of your original Eircom shares, which you can set against capital gains on other investments, including Eircom bonus shares.

This is the only issue that affects the tax year ending December 31st, 2001, as you cannot offset a capital loss against other gains until you have realised the loss and if you have not yet sold the Vodafone shares received for Eircell, there is, as yet, no realised loss. But you will need to offset against any loss the amount returned to you for any fraction of shares that arose following the conversion of your Eircell stock into Vodafone stock. On bonus shares, they carry an original cost of nil and their full value is considered a capital gain. So each bonus share in Eircom would carry a capital gain of €1.335 at the time of the Valentia deal. Turning to the locked-in value of Vodafone shares, the equation governing the base cost of your Vodafone holding - where every two Eircell shares were worth 0.9478 of a Vodafone share is as follows: €3.90 - €1.69 = €2.21 per Eircell share x2 /0.9478 = €4.66 to the nearest cent. On rough current figures, you are nursing a loss of €3.175 per Vodafone share, against which you would have to offset the absolute sale price of your bonus shares.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail: dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.