| Investment trust | Unit trust | Open-ended investment company | Exchange traded fund | |
| Nature of fund | Closed-ended | Open-ended | Open-ended | Open-ended |
| Legal structure | Company | Trust | Company | Company |
| Investors’ holding | Shares | Units | Shares | Shares |
| Pricing frequency | Real time | At valuation point | At valuation point | Real time |
| Pricing calculation | Reflects value of underlying investments but driven by supply and demand | Precise value of underlying investments, charges within spread | Precise value of underlying investments, charges shown separately | Based on underlying investments (due to arbitrage activities of ETF manager) |
| Stock exchange listing | Listed | Not listed | Listing optional | Listed |
| Secondary market | As for ordinary shares | Direct with manager | Direct with manager | As for ordinary shares |
Key advantages and risks of investments trusts
Gearing
Investment trusts are not always constrained by the investment restrictions that apply to most open-ended funds. Specifically, many are free to take on gearing (to borrow additional money to invest). When stock markets are performing well this can boost returns, since share prices tend to appreciate over the longer term. However, it also adds risk as, when share prices fall, the losses of geared funds are multiplied. In practice, investment trusts have had mixed success using gearing as a way to supplement their investment gains. Furthermore, it is sometimes expensive for such funds to borrow money and higher borrowing costs impact the returns their investors will ultimately receive.
Liquidity requirements
Investment trusts have lower liquidity requirements than open-ended funds because they do not have to release capital when their shares are sold. It could be argued that this provides them with a greater ability to make higher-risk and longer-term investments.
The bottom line
Open-ended funds may represent a safer, more liquid choice, but investment trusts may be able to provide superior returns in certain circumstances due to more flexible investment policies. In any case, investors should always compare the merits of different products before use, as both open-ended funds and investment trusts can provide useful and differing investment exposure.
| Open-ended funds | Closed-ended funds |
| Price closely reflects the underlying net asset value of the investment | Price is determined by supply and demand, and may trade at a premium or a discount to the mark-to-market value of the fund’s underlying investments. |
| There are no restrictions on the amount of shares (or units) funds may issue. The size of the fund will depend on the demand for its units from investors. However, if the fund is becoming too large its manager may choose to prevent it from receiving further investment in consideration of maintaining an ability to efficiently implement its investment strategy. | The trading of shares does not affect the size of the fund. |
| Assets may have to be sold to raise cash to pay investors if they decide to liquidate their holdings. | When investors sell, the total amount of money invested in the fund remains the same. |
