Unit Trusts versus Investment Trusts

Posted on December 21, 2010

Unit Trusts and Investment Trusts are both forms of long-term investment in the stock market. The two types of Trusts have notable differences and the right decision for investing money will depend on an individual’s requirements and expectations.

Unit Trusts

A Unit Trust allows individuals to buy units of a collective investment, spreading the risk across a portfolio of pooled investments. Each trust is made up of a set number of units and creates an open-ended investment. This means the total asset value of the Trust is always kept in the public domain, as is the Trust’s specified investment objective, which outlines the aims and limitations of the Trust.

Unit Trusts can give you access to a broad range of securities and their open-book policy can make this type of investment easier to understand and engage with than the denser Investment Trusts. However, as with all speculative or equity based investments, there is an element of risk involved.

Investment Trusts

An Investment Trust is also a form of collective investment although, unlike Unit Trusts, they are close-ended. This means that technically the term ‘Trust’ is misleading, as they are actually private limited companies, not beholden to trustees. Consequently, Investment Trust shares are traded on the Stock Exchange and the advertised share price does not always reflect the asset value.

Another chief difference between Unit Trusts and Investment Trusts is that Fund Managers of Investment Trusts are allowed to borrow capital for share purchase. Although this leverage can bring increased profit, it also increases the risk.

Investment Trusts are therefore more popular with those who are happy to take a high-risk, high-reward strategy with regards to their investment, or have a large stock portfolio.

You should seek independent financial advice to provide counsel on which type of trust matches your personal attitude towards risk, your investment intentions and your existing portfolio.

Unit trusts and investment trusts are equity based investments and their value can fall as well as rise. Past performance is no guide for the future and you may experience a level of volatility with these types of investments.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.