Investment Trusts vs Unit Trusts

Investment trusts and unit trusts are long-term investments in the stock market. Before choosing which scheme to use, you must first clarify your objectives and what potential outcomes you're looking for and establish which trust is the right one for your plan. Below, we've listed the characteristics and differences of investment trusts vs unit trusts, to help you make a well-informed decision.

Unit Trusts

Unit trusts allow investors to invest in units or collections of stocks. This spreads the potential risk across a portfolio of pooled investments, creating an open-ended investment. This also means that the trust's total asset value is kept public, as is the trusts limitations, specified objectives and aims.

When considering investment trusts vs unit trusts, the main benefits and characteristics of unit trusts are listed as:

- Open ended: All sales are dealt with cash and go straight through the manager. Net redemption require the manager to to sell underlying investment to meet demand for cash flow.

- Price of units are based on the net asset value of underlying investments.

- UTs have only one class of unit and all units must be treated equally.

- UTs are only allowed to advertise under approval of trustees.

- Annual management charges of unit trusts range from 0.75% to 1.5%.

Investments Trusts

Investment trusts, like unit trusts, are also a collective form of investment. However, they are closed-end trusts. Technically speaking, the term 'trust' in this case is somewhat misleading; they are private limited companies, not trustees.

Investment trusts can be traded on the Stock Exchange, but the share price advertised may not reflect the asset value. Another difference between investment trusts and unit trusts is that investment trusts can borrow capital for share purchase, bringing both increased profit but increased risk.

The general characteristics of investment trusts are:

- Closed-ended: traded on the Stock Exchange; no cash flow in or out of the fund.

- Shares are bought on the stock exchange and costs include brokerage, PTM levy and stamp duty.

- Shares cannot be advertised to the public.

- Costs of managing investment trusts are usually around 1% per annum.

Which works best?

When comparing investment trusts vs unit trusts it's important to remember each will have beneficial characteristics depending on your objectives and outcomes. An investment trust, for example, consists of a 'high-risk high-reward' strategy whereas a unit trust allows investment to be spread over a portfolio of potentials reducing risk but also reducing extremely high-returns associated with investment trusts.

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