Investment trusts have been around for over 150 years, although unit trusts did not make their debut until the ‘30s. A lot of people don’t know what exactly the differences are between investment trusts and funds, but it’s easy to distinguish between the two. Even though there are key differences in the benefits they can provide you, it essentially boils down to the way they are structured.
This does not constitute advice and advice should be sought in all instances before acting on it.
Structural differences
An investment trust is a limited company with a fixed number of shares that investors can buy or sell on the stock exchange. Investment trusts are also called ‘closed-ended’ because of the fixed number of shares the company makes available. This makes them easier to manage because investors buy directly rather than going through a fund manager.
With closed-ended trusts, managers don’t need to worry about investors suddenly pulling their money out in a turbulent market and this means they can plan for long-term goals.
Trusts also have a board looking out for your interests. They select the investment manager for the trust.
A unit trust, or OEIC, is called an ‘open-ended’ fund. Fund managers can create or liquidate units/shares depending upon investor demand. If they’re successful, unit trusts can grow quickly in size, something an investment trust generally cannot achieve.
Tax rules
The tax rules for both investment trusts and funds are generally similar, but there is one difference when it comes to income, which has recently become of utmost importance: after deducting charges, the income from investments held by unit trusts and OEICs must be 100% distributed to their investors.
Meanwhile, investment trusts can keep up to 15% of the income they receive. Investment trusts traditionally have used this flexibility to retain some reserves in case they need to ever bridge the flow of dividends to their investors during less profitable years.
Some investment trusts boast 40 or more consecutive years of dividend increases because of this.
More changes to dividend payments
In the midst of the global pandemic, many UK and overseas companies stopped dividend payments. Dividend payments from many unit trusts and OEICs, (in particular income-oriented) are also expected to fall. However, the investment trusts with income reserves might choose to tap into them and maintain dividends to their investors.
Some people look at it as a matter of timing: if you’re getting consistent dividends from an investment trust even during tough times, that means they previously held back income you could have received earlier. It’s not hard to see the appeal of the conservative approach given the state of the world.
Let us help you protect your assets
Investment trusts and funds offer different things so you might end up using both and more than one type -there are a wide variety and they all do different things so it’s best to consult a financial adviser to ensure you’re using the right trusts for your assets.
With the strategic use of trusts and funds as part of your financial plan, the Dental & Medical Financial Services team can help you ensure your chosen family and friends will benefit from the inheritance you want them to receive.
Connect with your trusted independent financial adviser to review and update your financial plan today.
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