Investment Trust or Unit Trust? Where Should I Invest my Money?
Your hard-earned money deserves to be somewhere it will grow. Choosing where to invest your funds is a difficult decision to make.
As an investor, you may need to choose between a more flexible fund or a restricted fund. Among the two most commonly chosen yet debated are closed and open-ended funds or more popularly known as investment trust and unit trust.
These are both pooled investment funds being run by a manager who picks and chooses a portfolio of assets for the investors, including bonds, company shares, or property. Often, a fund manager can run on both types of funds with almost identical portfolios and similar aims.
While investment trust and unit trust might look the same, the difference can’t be overstated.
Investment trusts are companies that hold assets including shares. These providers are run by a fund manager and backed independent board that acts in the best interests of shareholders. Investment trusts predominantly invest in other companies’ shares, but they can also invest in other financial assets.
As a closed-ended fund, investment trusts make use of a fixed number of shares which allows managers to take a longer-term view since they don’t need to sell assets when investors sell their shares.
Investment trusts can hold back up to 15% of income created by underlying assets annually to build up a reserve that can be used to smooth dividend payments at certain times. This allows the investor to enjoy a steady income regardless of the market’s performance. Investment company boards may also elect to pay income from capital. This can eat away at the long-term capital returns created by the funds, but many investors are fine to prioritize short-term income payments.
Investment trusts can allow investors to get exposure to specialist sectors which are difficult to access via open-ended funds. The investment trust pricing works uniquely as well. When the price is greater than the value of the assets, this is known as a premium. When it is less, it is known as a discount.
Unit trusts are considered the most common type of collective investment scheme and are also known as open-ended funds since they accept more cash from investors – continually growing to accommodate the demand. There are also more sellers than buyers. This is due to it being structured as a company, allowing it to create shares for new investors and which will buy shares back from investors if they wish to sell.
The fund’s cost always reflects the value of its holdings. When more investors are looking to buy into the fund than sell, the manager can issue more units. When the opposite, the manager cancels units. They are broadly used although some can be more expensive than their investment trust alternatives. It’s crucial to compare costs.
What’s great about open-ended funds is their flexibility for creating more units, as well as more funds that can be made available, which offers a much greater choice for investors.
The bottom line
So, what’s the best choice for you? Depends. Investing is based on market conditions, risk factor involved and other circumstances. The most appropriate approach to build a portfolio is for it to be balanced – sometimes the right choice will be a unit trust, sometimes it’s the investment trust. Learn more about unit trusts by visiting bank sites. Unit trusts are currently the most popular route to investing. Investment trusts can however be more suitable in some cases. You don’t have to choose between them really – you can hold a mixture of the two. In most cases, it’s not the vehicle, but the fund manager’s performance.