What is a Unit Trust?
A Unit Trust (UT) is a type of investment fund where money from investors (known as Unit Holders), is pooled together and managed by a professional fund manager to maximise returns. The fund manager invests the money in a variety of assets, such as stocks, bonds, and real estate with the goal of maximising returns. Investors can buy and sell units in the fund, which represent a share of the underlying assets.
What is a Investment Trust?
An Investment Trust (IT) is a type of investment fund that is publicly traded on a stock exchange, so investors can buy and sell from the market. Both Unit Trusts and Investment Trusts are pooled investment vehicles, run by a manager who selects a portfolio of assets (shares, bonds etc.) on behalf of investors.
Unit Trusts vs Investment Trusts key differences:
Structure
Unit Trusts (UTs) are open-ended, so they can issue an unlimited number of shares and can keep getting bigger and bigger to accommodate investor demand. These units are offered directly to investors by fund companies.
On the other hand, Investment Trusts (ITs) are closed-ended and therefore issue a fixed number of shares. These shares are offered by investment companies via an initial public offering, after which the shares are listed on an exchange. As such ITs are organised in the same fashion as a publicly traded company.
Gearing
ITs have the ability to adopt “gearing”, this means that the manager can borrow money to use for further investment if they see an opportunity in a particular market. UTs managers can use gearing as well but are far more restricted in this area to do so.
In rising markets gearing can lead to gains being amplified, but when markets are falling the losses are exaggerated. This ability to borrow is one factor that, generally, makes ITs more volatile than their Unit Trust counterparts.
Pricing
UTs prices are fixed once a day at their Net Asset Value (NAV).
Being on an exchange means that ITs prices are affected by market demand, and so their share prices may be bought/sold higher or lower than the NAV. These prices are intraday i.e. change during the day.
Here is a table that summarizes the key differences between unit trusts and investment trusts:
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Unit Trust
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Investment Trust
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Structure
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Open-ended
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Closed-ended
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Listing
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Not listed on a stock exchange
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Listed on a stock exchange
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Gearing
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Not generally allowed
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Can use gearing
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Pricing
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Priced once a day at NAV
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Priced throughout the day
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Taxation
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Taxed as income
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Can be taxed as income or capital gains
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Which is right for you?
The best type of investment vehicle for you will depend on your individual circumstances and investment goals. If you're looking for a flexible and liquid investment, a Unit Trust may be a good option. If you're looking for an investment that can offer the potential for higher returns but come with higher risks, then an Investment Trust may be a better choice.
Additional things to consider:
Cost: UTs are generally cheaper than ITs, because they do not have to pay the costs associated with being listed on a stock exchange.
Liquidity: UTs are more liquid than ITs which means that you can buy and sell them more easily. This can be important if you need to access your money quickly.
Risk: ITs can be more risky than UTs, because they can use gearing. This means that they can amplify your returns, but they can also magnify your losses.
How to choose:
If you're not sure which type of investment vehicle is right for you, it's a good idea to speak to a financial adviser. They can help you understand your individual circumstances and investment goals, and they can recommend a suitable investment product.
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