What's The Difference: Investment Trust Vs Mutual Fund?

Investment trusts and mutual funds are both types of pooled investment vehicles, but they differ in their structure, management, and tax efficiency. Investment trusts, also known as closed-end funds, have a fixed number of shares and are traded on recognised stock exchanges, while mutual funds, or unit trusts, are open-ended and issue units based on investor demand. Investment trusts are run by professional managers who pick a portfolio of assets on behalf of clients, and they can also borrow money to invest, known as gearing, which unit trusts are not allowed to do. Mutual funds, on the other hand, are subject to daily valuation and forward pricing, and can impose exit penalties during financial crises. Understanding the differences between these two investment options is crucial for investors to make informed decisions aligned with their financial goals.

Investment trusts are closed-end funds with a fixed number of shares

Investment trusts are listed companies, and their shares are bought and sold on a stock market. The price of these shares is determined by demand and supply in the market. Because a fixed number of shares is issued, these funds are known as 'closed-end' or 'closed-ended'.

The fixed number of shares in an investment trust means that they do not have money flowing in and out unpredictably. This gives the portfolio manager a high level of control and the flexibility to build a long-term strategy, as they are able to invest and sell when they feel the time is right.

The price of shares in an investment trust is dependent on two key factors: the performance of the underlying assets, and supply and demand for the shares. At any particular time, the shares could be trading at a discount to the value of the underlying assets (where investor demand is low), or at a premium (where investor demand is high).

Investment trusts are able to borrow money to invest in more assets on behalf of their shareholders. This is known as 'gearing' and can enhance returns, though it can also magnify losses.

Mutual funds are open-ended funds that issue units

While investment trusts and mutual funds share similarities, they are structured differently. Mutual funds are open-ended funds that issue units, whereas investment trusts are closed-ended funds that issue a fixed number of shares.

Mutual funds, also known as unit trusts, are the more popular option on the market. They are open-ended funds that issue units representing the diversified holdings of the fund. When more people want to buy into a mutual fund, more units are issued. The units in a mutual fund always reflect the value of the underlying investments of the fund (minus any charges). Mutual funds are not established as companies and are governed as a legal trust.

On the other hand, investment trusts are closed-ended funds. They issue a fixed number of shares, which are bought and sold on a stock market. The price of these shares depends on demand and supply in the market. Investment trusts are listed companies, and as such, they have boards and shareholder meetings, which mutual funds do not.

The difference in structure between mutual funds and investment trusts leads to several key differences. Firstly, mutual funds are not allowed to take on gearing, or borrowing additional money for investments, whereas investment trusts can. Secondly, mutual fund managers must distribute their profits annually, while investment trusts can keep back up to 15% of their profits for 'smoothing' purposes. Lastly, selling an investment trust comes with different issues compared to selling a mutual fund. With a mutual fund, you sell units back to the fund manager, while investment trusts are bought and sold on the stock exchange.

Investment trusts can borrow money for investments, mutual funds can't

Investment trusts and mutual funds are both financial organisations that pool investors' money to invest in a diversified portfolio of stocks or other assets. However, they differ in several ways, one of which is that investment trusts can borrow money for investments, while mutual funds cannot.

An investment trust is a listed company that issues 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. Investment trusts are run by professional managers who pick a portfolio of assets on behalf of their clients. As companies, they have boards and shareholder meetings, which mutual funds do not.

Mutual funds, on the other hand, are open-ended funds that issue units rather than shares. These units represent the diversified holdings of the fund. When more people want to buy than sell, more units are issued. The price of units in a mutual fund reflects the value of the underlying investments of the fund.

One key difference between the two types of funds is that investment trusts can take on gearing, or borrow additional money for investments, while mutual funds are not allowed to do so. This means that investment trusts can take on more risk, potentially leading to bigger rewards or bigger losses.

Another difference is that investment trusts can keep back a portion of their profits for "smoothing" purposes. Mutual fund managers must distribute their profits annually, while investment trusts can use the income they keep back to help pay dividends in less fruitful years. This allows some investment trusts to increase their dividends year after year without interruption.

In summary, while both investment trusts and mutual funds pool investor funds to create a diversified portfolio, investment trusts have the added ability to borrow money for investments, giving them more flexibility and potential for higher returns or losses.

Investment trusts are listed companies, mutual funds are not

Investment trusts and mutual funds differ in how they are structured and the rules that govern them. An investment trust is a listed company, and shares in this company can be bought and sold on a stock market. Mutual funds, on the other hand, are open-ended funds that are not established as companies and are not listed on a stock exchange.

As a listed company, an investment trust will have a board of directors, which is responsible for supervising the activities of the fund managers and ensuring they perform well and comply with the objectives of the trust. Investment trusts also have fixed numbers of shares, making them closed-end or closed-ended funds. The price of these shares is determined by demand and supply in the market.

Mutual funds, as open-ended funds, work by splitting the assets they invest in into units. When more people want to buy than sell, more units are issued. The units in a mutual fund always reflect the value of the underlying investments of the fund (minus any charges). This is not the case for an investment trust, where the share price will reflect market sentiment, rather than simply the value of the assets.

The different structures of investment trusts and mutual funds lead to differences when it comes to selling. With a mutual fund, you sell units back to the fund manager. The funds are valued daily, but you do not know what price you will get. In contrast, investment trusts are listed on the stock exchange, so the price moves up and down with supply and demand.

Another difference is that investment trusts can take on gearing, or borrowing additional money for investments, which mutual funds are not allowed to do. This means investment trusts can take bigger risks, which could lead to bigger rewards or bigger losses.

Investment trusts have boards and shareholder meetings, mutual funds don't

Investment trusts and mutual funds are both types of pooled investment funds, but they are structured differently and governed by different rules.

An investment trust is a public limited company (PLC) that is listed on a stock exchange. As a company, it has a board of directors, which is responsible for supervising the fund managers and ensuring they perform well and comply with the objectives of the trust. Each investment trust has an independent board of directors, appointed to act in the best interests of shareholders.

Investment trusts have a fixed number of shares, which are bought and sold on the market. The price of these shares is determined by demand and supply in the market, and because of this fixed number, they are known as 'closed-end' or 'closed-ended' funds.

As a company, an investment trust will also hold shareholder meetings, which is something that mutual funds do not do. Shareholders in an investment trust are entitled to attend the Annual General Meeting (AGM) and vote on issues such as the appointment of directors, the trust's investment objective, and the remuneration of board members.

In contrast, mutual funds are open-ended funds, which means they do not have a fixed number of shares. Instead, they issue units that represent the diversified holdings of the fund. When more people want to buy than sell, more units are issued. Mutual funds do not have boards of directors or shareholder meetings as investment trusts do.

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