What is the difference between investment and unit trusts? What do they provide their investors?

Choosing the correct fund or investment trust to invest your hard-earned capital is an important and complex decision which you need to assure is the right one for you.

Today investors have a plethora of investment opportunities at their fingers tips, with a simple click on your phone or a quick call to an investment trust or firm, investors can access an extensive range of international markets and sectors in seconds. Not only are investors spoilt for choice in where they invest, but investors also have to decide what form of investment structure suits them best – open-ended funds vs investment trusts.

Investment trusts vs Investment funds

While investment trust and investment funds are both pooled investment options run by a professional manager who decides on what portfolio to invest in on behalf of investments, they are inherently different.

Investment trusts

Investment trusts can be described as companies that hold assets, such as shares on behalf of its stakeholders and investors. Run by a fund manager, investment trusts are backed and scrutinised by an independent board, ensuring the trust is not only returning fantastic returns but also operating in the best interest of its stakeholders.

As a closed-ended trust, investments have a fixed number of shares available for purchase which are traded on the stock exchange, with the share prices reacting to the performance of the trust. As there is only a set number of shares available for purchase, the fund or trust manager can create a long-term investment plan as they have a recurring budget available.

Unit Trusts

Unit trusts are the most common form of collective investment scheme in the UK and are commonly referred to as open-ended funds. In comparison to investment trusts, Unit Trusts will accept more cash from investor instead of having a fixed amount of shares available. Due to the structure of Unit Trusts and the ability to create shares, they usually are more flexible in terms of the size of operation they need to run; if demand is vast, they can accommodate for this by simply increasing the number of shares available to investors. If demand drops off the fund can become smaller if needed.

What benefits do they provide investors?

To understand what the best investment option is for you, you have to follow the benefits of a closed-ended vs open-ended investment trusts/funds.

Closed-ended Investment options.

1. Diversification: Closed-ended funds are more likely than open-ended funds to offer/include alternative investments in their portfolios, which provides investors with the chance to diversify their investment plan naturally. Furthermore, close-ended trusts can allow investors to gain exposure to specialist sectors of the economy which would be difficult to access through other investment options.
2. Steady income: One of the most significant advantages of closed-ended investment options is the regular income you can receive from a single investment. As many investment trusts hold onto a percentage of the revenue generated by underlying assets to build up a reserve to pay dividends when tougher times hit, investors can enjoy a steady income (market performance depending).
3. Gearing: For investors who are looking to grow their investment portfolio continually, managers at closed-ended investment trusts can borrow funds in order to take advantage of increasing share prices in potential investment options. This term known as ‘gearing’, allows investors to benefit from sudden changes in the market that the fund manager has found.
4. Share prices: The nature of a closed-ended fund also reflects how shares in the trust are priced. In comparison to open-ended trusts, closed-end investment shares reflect the market value rather than net asset value. This means if the share price is performing well, an investor can sell their stake for a significant profit (this is heavily influenced by demand and market performance).

Open-ended trusts

1. Liquidity: Open-ended funds are highly liquid. You can redeem your shares at any time. When you turn in a sell order, the fund liquidates your shares at the end of the next business day, and within a few days, you get your investment back.
2. Flexibility: As investors can sell or buy more stocks depending on performance, open-ended funds are far more of a flexible option in comparison to its counterpart. Furthermore, many opened funds are part of a ‘family’, so you can change to different funds as your investment objectives naturally change.
3. Affordable: Open-ended funds are often to be considered the more affordable investment option. As share prices are not fixed to the stock market, there is usually a fixed amount to pay to invest with that trust or fund.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.