What is the difference between an investment trust and a fund?
An investment trust is a company whose shares you buy; an open-ended fund creates and cancels units on demand. That structural difference produces several consequences that matter considerably more than the similar-sounding descriptions suggest.
Open-ended funds — unit trusts and OEICs. When you invest, new units are created; when you sell, they are cancelled. The fund grows and shrinks with investor flows, and the price is always the value of the underlying assets per unit.
Investment trusts — closed-ended companies listed on a stock exchange with a fixed number of shares. To invest, you buy shares from another investor. The manager's pool of capital does not change with investor sentiment.
What follows from that:
Discounts and premiums. A trust's share price is set by supply and demand and can differ from the net asset value — trading at a discount or a premium. This creates both an opportunity and a risk that open-ended funds do not have, and the discount can widen exactly when you want to sell.
Illiquid assets are safer in a trust. Because the manager never has to sell holdings to meet redemptions, trusts can hold property, infrastructure and unquoted companies sensibly. Open-ended property funds have repeatedly had to suspend dealing when redemptions exceeded what could be sold quickly — a structural flaw the closed-ended form does not share.
Gearing. Trusts can borrow to invest, amplifying gains and losses. Open-ended funds generally cannot.
Revenue reserves. Trusts may hold back income in good years to maintain dividends in bad ones, which is why some have raised their dividend for decades continuously — open-ended funds must distribute what they receive.
An independent board, which can replace the manager.
Trading, since trusts trade like shares with a spread and possibly commission, while funds are priced once daily.
Exchange-traded funds are a third structure: open-ended in creation but traded like shares, with market makers keeping price close to value.
General information, not financial advice.