By Steve Lodge
Published: November 27 2009 19:36
Last updated: November 27 2009 19:36
I keep hearing that investment trusts are better than open-ended funds such as unit trusts. But I can invest in many unit trusts for free, whereas with investment trusts, I face dealing commission, stamp duty and high spreads between buying and selling prices. Which type of fund is better?
Justin Modray, founder of Candidmoney.com, a financial website, says that both types of fund have their pros and cons.
Investment trusts tend to have lower annual costs than unit trusts but on initial costs, the comparison is less clear.
Investment trusts – unlike unit trusts – don’t have initial charges, but there is a difference between the buying and selling price of shares (the bid-offer spread). This is usually less than 2 per cent.
You also generally have to pay a dealing commission, typically around £10 if using an online stock broker, and stamp duty at 0.5 per cent.
Unit trusts (but not open-ended investment companies, or Oeics) often have bid-offer spreads of up to 7 per cent , of which 3 to 5 per cent typically comprises an initial fund charge. You can reduce or avoid this charge altogether by investing via a discount broker, but there may still be a residual bid-offer spread.
Oeics do not have an underlying spread but may still carry an upfront charge. While you don’t directly pay stamp duty on unit trust and Oeic purchases, the funds usually have to pay stamp duty when investors cash in units, which may reduce returns.
Unit trusts held in Isas are usually cheaper as most fund managers offer the tax-free wrapper for free. This compares favourably to investment trusts where you pay a stockbroker for a self-select Isa.
Investment trusts should generally perform better in rising stock markets as they can borrow to increase their exposure, known as “gearing”. This may be enhanced or offset by an investment trust’s share price fluctuating relative to the value of its underlying assets. But these factors don’t make investment trusts better or worse than unit trusts – just riskier.
The advice in this column is specific to the facts surrounding the questions posed. Neither the FT nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
From Financial Times Website
