Investment Trust
The main difference between a Unit Trust and an Investment Trust is that an Investment Trust tends to be cheaper. It is, however, a more complicated vehicle in that a range of other factors need to be taken into account to ascertain the true value of the investment.
Investment Trusts tend to trade at either a discount or a premium to their true net asset value. Put another way, if you were investing into a Unit Trust that had exactly the same holdings as an Investment Trust, it could well be that the value of the Unit Trust could be greater or less than the Investment Trust. The more popular an Investment Trust, the more likely it is to have external investment in the fund and, as a consequence, the individual shares start to trade at higher than their net asset value.
Buying in at this point creates an extra risk in that you are investing into a fund that potentially is more expensive than it should be; it is, however, not necessarily true to say that because an investment trust trades at a discount to its overall net asset value, that it is a good idea to invest in it. That discount could narrow or widen.
Other factors need to be taken into account, such as the Fund Manager’s contract and his pay structure, as these have an effect on the overall charges on the fund. Borrowing/gearing is possible in an investment trust and this can lead to higher risk/return/volatility particularly in a difficult market conditions.
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