Investment trusts vs unit trusts - UK advice

An investment trust is a company that invests in the shares of other UK companies. They are public limited companies, bound by company law and stock exchange practice, and can invest in unquoted companies. They are similar to unit trusts in that the company pools together the funds of a number of investors, and then invests these funds into a wide range of companies' shares. In addition, each type of trust can be integrated into a personal equity plan (PEP).

However, there are a number of significant differences between the two. Firstly, investment trusts are not open ended, which means the quantity of shares in issue is fixed, and as a result investors cannot pay into the funds on an ongoing basis. Instead, the investment company sells a fixed amount of shares to investors. Another key variation between the two is that unit trusts do not borrow money for their ventures, making them less volatile. However, this means they have restricted access to funds when needed and as a result are less able to take full advantage when the stock markets are rising.

Which is better, an investment trust or a unit trust?

The jury is out on this. On the whole, an investment trust tends to be the more uncertain of the two, but the potential gains can be significantly greater. Therefore, it is the investor's attitude to risk that tends to determine which of the two he considers to be the more suitable.

Where can I buy investment trusts shares?

A stockbroker can purchase them on your behalf, or you could get them through a regular savings scheme.

How much do they cost?

That depends on the net asset value of the investments held by the trust, and also on how popular that particular trust is amongst other investors.

How much can I invest?

Provided that at least fifty percent of the trust's assets are based in the United Kingdom or European Union, a maximum of £6,000 per year can currently be invested. If less than fifty percent of assets are UK or EU based, then this limit is reduced to £1,500 per annum.

© The Pink Fridge Online Magazine 2008 - Investment Trusts