Mutual Funds And Investment Trusts: What's The Difference?

The first modern mutual fund was launched in the US in 1924, marking a shift in the way people invested their money. Mutual funds are investment funds that pool money from many investors to purchase securities. The term is used in the US, Canada, and India, with similar structures existing in other parts of the world. While the idea of pooling assets for investment purposes is not new, the mutual fund allowed for greater accessibility and diversification for investors. In comparison, an investment trust is a listed company that issues a fixed number of shares bought and sold on the stock market. The price of these shares is determined by market demand and supply, and they are known as 'closed-end' funds. So, while both mutual funds and investment trusts pool investor money, the key difference lies in their structure and the rules that govern them.

Mutual funds are open-ended, while investment trusts are closed-ended

The main difference between mutual funds and investment trusts is that mutual funds are open-ended, while investment trusts are closed-ended.

Mutual funds and investment trusts are both types of investment fund that pool money from investors to purchase securities. However, their structures and the rules that govern them differ.

Mutual funds are open-ended funds, meaning they can create new units as more people invest. The units in a mutual fund always reflect the value of the fund's underlying investments (minus any charges). Mutual funds are also known as unit trusts because they split the assets they invest in into units. Mutual funds are typically actively managed, meaning fund managers make decisions about how to allocate assets.

On the other hand, investment trusts are closed-ended funds, meaning they have a fixed number of shares that are bought and sold on the stock market. The price of these shares is determined by market demand and supply, rather than simply the value of the assets. Investment trusts are listed companies, and as such, they have boards and shareholder meetings, which mutual funds do not.

Another difference is that investment trusts can take on gearing, or borrowing additional money for investments, while mutual funds cannot. Investment trusts are also allowed to keep back 15% of their profits for "smoothing" purposes, while mutual fund managers must distribute their profits annually.

The different structures of mutual funds and investment trusts also result in different processes for selling. With a mutual fund, you sell units back to the fund manager, while with an investment trust, you sell shares on the stock exchange.

Mutual funds are often actively managed, while ETFs are passively managed

Mutual funds and exchange-traded funds (ETFs) are two popular investment vehicles that offer investors a way to diversify their portfolios. While both types of funds have similarities, there are some key differences between them, particularly when it comes to their management style.

Mutual funds are often actively managed, meaning that fund managers make decisions about how to allocate assets and actively buy and sell stocks or other securities within the fund to try to beat the market and maximise profits for their investors. This active management style tends to come at a higher cost due to the substantial time, effort, and manpower required for securities research and analysis. As a result, actively managed mutual funds usually have higher fees and expense ratios compared to passively managed funds.

On the other hand, ETFs are typically passively managed. They track market indexes or specific sector sub-indexes and aim to replicate the performance of these indexes rather than trying to outperform them. This passive management style often results in lower fees and expense ratios for ETFs compared to mutual funds. While most ETFs are passively managed, there is a growing range of actively managed ETFs available to investors.

Actively managed ETFs function similarly to actively managed mutual funds, with fund managers making decisions about asset allocation and actively trading securities. However, one key difference is that actively managed ETFs trade like stocks and can be bought and sold throughout the trading day, whereas mutual funds can only be traded once a day after the market closes. This makes ETFs a more attractive option for active traders who want to be able to respond to intraday market movements.

In terms of performance, passively managed funds have consistently outperformed actively managed funds over the long term. This is because passive strategies tend to have lower costs associated with market research and management, which can result in higher returns for investors over time. However, actively managed funds may perform better during periods of high market volatility when average market returns are poor.

In summary, while mutual funds are more commonly actively managed and ETFs are usually passively managed, there is overlap between the two, with actively managed ETFs gaining popularity. Ultimately, the decision to invest in actively or passively managed funds depends on an investor's financial goals, risk tolerance, and investment horizon.

Mutual funds are purchased from the issuer, while investment trusts are bought and sold on the stock market

Mutual funds and investment trusts are both types of investment funds that pool money from investors to purchase securities. However, there are some key differences in how they are structured, regulated, and traded.

Mutual funds are typically open-ended funds, which means they can issue new units or shares to investors as demand increases. The price of a mutual fund is based on the net asset value (NAV) of the underlying investments, and these funds are usually actively managed by a fund manager. Mutual funds are purchased directly from or sold back to the fund issuer, and this can be done at the end of each trading day based on the NAV calculated at the close of that day.

On the other hand, investment trusts are structured as listed companies and are typically closed-ended funds. This means they issue a fixed number of shares that are bought and sold on a stock market. The price of these shares is determined by market demand and supply, and it may trade above or below the NAV of the underlying assets. Investment trusts are allowed to take on gearing, or borrowing money for investments, which can lead to bigger risks and potentially bigger rewards or losses.

In terms of regulations, mutual funds are required to register with the Securities and Exchange Commission (SEC) and provide full disclosure of their holdings and performance through a prospectus. They are also subject to specific laws and regulations, such as the Securities Act of 1933 and the Investment Company Act of 1940, which aim to protect investors and minimize conflicts of interest.

Investment trusts, on the other hand, have different rules. For example, they are allowed to retain a portion of their profits for "smoothing" purposes, which allows them to pay dividends consistently even in less fruitful years. Additionally, investment trusts have boards and shareholder meetings, while mutual funds do not.

In summary, the main difference between mutual funds and investment trusts lies in their structure, regulation, and trading process. Mutual funds are open-ended and actively managed, with their units or shares purchased directly from the fund issuer. Investment trusts, on the other hand, are closed-ended and traded on a stock market, with their share prices influenced by market demand and supply.

Mutual funds are more popular than investment trusts

The popularity of mutual funds and investment trusts has fluctuated over the years, with several factors influencing their respective performances and appeal to investors. While investment trusts were popular in the early 20th century, mutual funds have gained prominence in recent decades. Here are some reasons why mutual funds are currently more popular than investment trusts:

Historical Context

The concept of pooling assets for investment purposes is not new, with historians tracing its origins to the 1800s. The first modern mutual fund was launched in the US in 1924, while investment trusts, or closed-end funds, have been around since the 1800s. In 1929, there were nearly six times as many closed-end funds as mutual funds. However, the stock market crash of 1929 significantly impacted closed-end funds, and the subsequent regulatory changes favoured the growth of mutual funds.

Regulatory Changes

The Wall Street Crash of 1929 led to increased government scrutiny of the securities markets and mutual funds. The US Congress passed several acts, including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, which established guidelines and safeguards for investors. These regulations encouraged the development of open-end mutual funds, which offered greater flexibility and advantages over closed-end funds.

Structural Differences

Mutual funds are open-ended funds, allowing them to issue new units whenever there is higher demand from investors. In contrast, investment trusts are closed-end funds with a fixed number of shares. When more people want to buy mutual fund units, the fund manager simply creates more units, reflecting the value of the underlying investments. On the other hand, investment trust shares are traded on the stock market, and their price is determined by market demand and supply, which can deviate from the actual value of the trust's assets.

Management and Risk

Mutual funds are actively managed by fund managers, who make decisions to buy and sell securities within the fund to maximise returns for investors. While this active management comes at a higher cost, it offers investors a more hands-on approach to their investments. Investment trusts, on the other hand, can be passively managed, tracking market indexes or specific sector indexes. This passive management generally comes with lower fees but may result in lower returns compared to actively managed funds.

Investor Accessibility

Mutual funds typically have higher minimum investment requirements than investment trusts. While this may be a barrier for some investors, it also appeals to those with larger sums to invest. Additionally, mutual funds are often favoured by retirement plans, further contributing to their popularity. The accessibility and wider distribution of mutual funds have made them a preferred investment option for many individuals.

Mutual funds are more heavily regulated than investment trusts

The concept of pooling resources for investment purposes has been around for centuries, but the first modern mutual fund was launched in the US in 1924. In the years since, mutual funds have become mainstream investments, forming the core of individual retirement accounts.

Mutual funds are heavily regulated by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. They are required to register with the SEC and to provide full disclosure of their holdings and performance in the form of a prospectus. This prospectus must include essential facts about the investment, including performance, comparisons of performance to benchmarks, fees charged, and securities held.

Mutual funds are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 Act requires a documented prospectus for investor education and transparency, while the 1934 Act requires issuers of securities, including mutual funds, to report regularly to their investors.

In contrast, investment trusts are not regulated by the SEC. They are overseen by bank regulators and are subject to ERISA (the Employee Retirement Income Security Act of 1974). Investment trusts are also exempt from certain regulatory requirements that apply to mutual funds. For example, investment trusts can take on gearing, or borrowing additional money for investments, which mutual funds are not allowed to do. This means that investment trusts can take on bigger risks, potentially leading to bigger rewards or bigger losses.

Another key difference between mutual funds and investment trusts is their structure. Mutual funds are open-ended funds, which means they can issue new shares as demand increases. In contrast, investment trusts are closed-ended funds, issuing a fixed number of shares that are traded on the stock market. The price of these shares is determined by supply and demand and can deviate from the value of the underlying assets.

The heavier regulation of mutual funds compared to investment trusts can be seen as a way to protect investors, ensuring transparency and disclosure of information. However, the lighter regulation of investment trusts gives them more flexibility and the ability to take on more risk. Ultimately, the decision to invest in mutual funds or investment trusts depends on an individual's investment goals and risk tolerance.

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