Difference between types of all these funds

SteveSilva

I have been trying to find out the difference between Unit trusts, Investment trusts, ETf's etc. I realise that ETf's are actively managed whereas the other two aren't but what are the difference between Unit trusts and inestment trusts, I really fail to understand. Terms like open ended, and closed doesn't make much sense to me.
Surely its important to understand before taking the plunge or am I thinking to much into it?

dunstonh

I realise that ETf's are actively managed whereas the other two aren't

That is not correct.

Surely its important to understand before taking the plunge or am I thinking to much into it?

It is important to understand in great detail if you intend to DIY or understand the basics if you are using someone to do it for you.

The UT/OEIC, IT, ETF, SICAV, Life funds, Pension funds etc (included some other fund universes as well for good measure) all have pros and cons and things you need to be aware of.

There is quite a good site here if you want to read up on it:
http://www.incademy.com/pages/home.htm?ginPtrCode=10002

Loughton_Monkey

Unit Trusts went out long before the Spice Girls, although, like the Spice girls, some of them are still around polluting the atmosphere.

Most of them converted to OEIC's [Open Ended Investment companies]. They are very similar to Unit Trusts, except the charge by a fixed % up front. Unit Trusts charge up front by a "bid offer" spread where the bid price is typically about 5% lower than the offer price.

Unit Trust/OEIC: You buy 'units' in a 'fund'. The Fund Manager (in theory) invests very carefully, and wisely amongst shares and other investments within the 'focus' of the fund [focus - e.g. Japan smaller Companies. UK Property etc.]. Every day, the fund is revalued and the unit price updated. The fund can grow very large (if lots of people buy) or dwindle when lots of people sell.

Investment Trust: Imagine you and I set up as a company, with a limited amount of capital. Then we behave just like a fund manager (as above). But we have a fixed amount - which grows or falls according to our success. But just like any other (trading) company, we issue shares. An investment trust is simply common shares in this investment company. They trade contiuously throughout the working day. The price goes up or down just like shares in, say, Vodaphone, or Barclays. The share price multiplied by the number of shares can be greater or less than the actual value of the funds.

ETF: This is a bit of a hybrid. It behaves very much like an OIEC or Unit Trust, except that it also trades throughout the day. They tend to track an index, and so are not 'actively managed' although this is not always the case. Unlike Investment Trusts, their value tends to equate pretty much to the actual underlying fund value.

Reaper

You have some good answers above, though I would just add Investments Trusts have the unique ability to borrow money to invest if they think they have seen a good opportunity, while an OEIC has to buy or sell when investors put money in or take it out. It means Investment Trusts may well go up faster in the good times and down faster in the bad. They also often trade at a discount.

Charges can have a significant effect on returns. Not suprisingly actively managed funds that do research and have fund managers that decide where to invest charge more than those that simply copy an index.

As a rough rule the charges would go as follows, from cheapest to most expensive:

1) ETFs + tracker OEICs
2) Investment Trusts
3) All other actively managed OEICs and Unit Trusts

However those are just a rule of thumb, there are plenty of exceptions, you will have to check the charges of the thing you are interested in.

P.S. I often refer to OEICs and Unit Trusts collectively as "Unit Trusts". This is inaccurate but I am not alone in my careless use of the word - somehow "OEIC" doesn't roll off the tongue.

saverjustice

Forget them, go and open an online share dealing account.

SteveSilva

Ok guys, what is the difference though of buying a unit in OEIC/Unit trust or buying a share in an Investments Trust. I mean if you invest say £1000 in a unit or a share, why isn't the same thing?

jimjames

Investment trusts are traded on the stock market in their own right so the share price can be higher or lower than the value of its assets. A unit trust will always be the value of its assets divided by the number of units. Unit trusts are open ended - can create more units but investment trusts are fixed numbers of shares in issue.

SteveSilva

Thanks jimjames,

So from an inestors point of view why does it matter which type of fund to go or? I realise O.E.I.C.'s can have different structures in regard of charges i.e. "bid, offer prices, exit charges etc etc. An IT however has the same price for buy or sell, it offers dividends, (not sure if OEIC's do)
However in terms of risk they all invest in companies the fund manager chooses and are susceptible to stock market fluctuations.

dunstonh

I realise O.E.I.C.'s can have different structures in regard of charges i.e. "bid, offer prices, exit charges etc etc. An IT however has the same price for buy or sell, it offers dividends, (not sure if OEIC's do)

OEICs are single priced. There is no bid/offer spread on them.

So from an inestors point of view why does it matter which type of fund to go or?

you look at pros and cons and make an informed choice.

However in terms of risk they all invest in companies the fund manager chooses and are susceptible to stock market fluctuations.

Yes. However, you may have gearing to be aware of or buying at a premium or discount. Things a UT/OEIC does not have. Typically, the IT is a bit higher in risk than the equivalent UT/OEIC. That may make you prefer it but it may put you off.

Linton

SteveSilva wrote: »

Thanks jimjames,

So from an inestors point of view why does it matter which type of fund to go or? I realise O.E.I.C.'s can have different structures in regard of charges i.e. "bid, offer prices, exit charges etc etc. An IT however has the same price for buy or sell, it offers dividends, (not sure if OEIC's do)
However in terms of risk they all invest in companies the fund manager chooses and are susceptible to stock market fluctuations.

Not quite right. An IT is a normal stock exchange listed share and so there are the same dealing costs as with any other share. There will also be a bid/off spread, again the same as any other share.

An OEIC may provide income, though as it's not a company its income isnt classed and taxed as a dividend.

Another difference is that the price of an IT is always current and so an IT can be traded immediately like any other share. An OEIC is normally valued once a day and so if you sell today you wont get the money (nor know exactly how much money you are going to get) til a day or two later.

Reaper

SteveSilva wrote: »

So from an inestors point of view why does it matter which type of fund to go or? I realise O.E.I.C.'s can have different structures in regard of charges

To add to what has been said above there are other differences. As a rule of thumb to which there are exceptions Investment Trusts cost more to buy up front as there is stamp duty tax to pay (because you must pay that on shares which these count as), a bid/offer spread, and any broker dealing charges. Wheras via a discount broker there is often no upfront fee at all on an OEIC. However the annual charges on an Investment Trust are usually lower. So if you expect to chop and change a lot an OIEC might cost you less, if not the Investment Trust is likely to be cheaper over the medium/long term.

Also Investment Trusts tend to trade at a discount, though not for any good reason I've ever been able to figure out. You should see 2 prices quoted - the NAV and the share price. The NAV tells you what the value of all the investments they hold, wheras the share price tells what it will cost you to buy in. Typically the share price will be below the NAV. If there is a 10% discount that means effectively you are buying all the investments they hold for 10% less than they are worth. That can mean you get a boost on the dividend income.

The discount tends to be large on unpopular poorly performing ITs and small or even go positive on the popular ones.