No, investment trusts are not automatically better than funds; the right choice depends on risk, time horizon, and how you prefer to invest.
Ask a room of investors, “are investment trusts better than funds?” and you will hear plenty of strong views. Both options pool money from many investors, both are run by professional managers, and both can sit inside an ISA or pension. Yet the way they are built, traded, and priced can lead to distinct outcomes for your savings.
This guide sets out how each structure works, the main contrasts that matter for real portfolios, and the kind of person each one suits. The aim is simple: help you see where an investment trust can add value, where an open ended fund feels more comfortable, and when a mix makes sense.
Quick Comparison: Investment Trusts And Funds
Before going into detail, it helps to see the main contrasts between an investment trust and an open ended fund such as a unit trust or OEIC.
| Feature | Investment Trust | Open Ended Fund |
|---|---|---|
| Legal Form | Public company listed on a stock exchange | Collective scheme where units or shares are created and cancelled |
| Pricing | Share price set by market and can trade below or above net asset value | Price usually set once a day at net asset value |
| Trading | Buy and sell through a broker during market hours | Buy and sell through the fund provider or platform |
| Gearing | Can borrow to invest, which can sharpen gains and losses | Normally cannot borrow to invest in the same way |
| Income Policy | Can hold back income in strong years to smooth dividends later | Passes income through each year with limited smoothing |
| Costs | Ongoing charges plus share dealing costs and bid ask spread | Ongoing charges, sometimes with entry or exit fees |
| Access | Wide choice on investment platforms but some trusts have limited liquidity | A broad range including tracker funds and low minimum contributions |
What Are Investment Trusts And Funds?
An investment trust is a closed ended fund. It raises a fixed pool of capital by issuing shares on a stock exchange, then invests that pool in assets such as shares, bonds, or property. Investors buy and sell the trust’s shares on the market, often through an ISA or pension account. The price can sit above or below the value of the underlying portfolio, known as the net asset value or NAV.
By contrast, an open ended fund such as a unit trust or OEIC creates and cancels units as investors move money in and out. New money flows into the underlying portfolio; money leaving is raised by selling assets. The fund price is struck at least once a day based on NAV. You usually trade directly with the fund provider or through an investment platform rather than on the stock exchange.
Many beginners first meet both structures through pooled funds inside pension schemes. Guides from services such as the MoneyHelper beginner’s guide to investing explain how pooled funds spread risk across many holdings and why that can help smooth returns across market cycles.
How Investment Trusts Operate
Investment trusts sit on the stock exchange as public companies with an independent board. The board appoints a fund manager to run the portfolio and can change manager if results disappoint. Because the trust has a fixed pool of shares, the manager does not need to handle daily flows of money in and out. That makes it easier to hold less liquid assets such as smaller companies or infrastructure projects.
A central feature is the ability to borrow, often called gearing. The trust can take on debt and invest the borrowed money alongside shareholder funds. In rising markets this can lift returns, while in falling markets it magnifies losses. The choice to use gearing, and to what level, sits with the board and manager and should be set out clearly in the trust’s documents.
How Open Ended Funds Operate
Open ended funds such as unit trusts and OEICs are collective schemes where investors buy and sell units directly from the fund. When new money flows in, the manager creates more units and invests the cash. When people sell, units are cancelled and assets are sold to raise cash for redemptions. In the UK, the legal framework for unit trusts and similar schemes is set out in rules overseen by bodies such as HMRC and the Financial Conduct Authority.
Because units are usually priced at NAV, you do not see the discounts and above NAV pricing that come with listed trusts. Instead, what you see each day is the value of the underlying assets less fees. That can give nervous investors more comfort because the price on the screen matches the stated value of the portfolio at the last valuation point.
Are Investment Trusts Better Than Funds? Key Questions To Ask
The blunt question “are investment trusts better than funds?” does not have a single right answer. Each structure suits a different mix of goals and attitudes to risk. To reach a choice that fits you, it helps to step through a few practical questions.
How Do You Feel About Price Swings?
Investment trusts bring two moving parts. The portfolio can rise or fall and the discount or above NAV price can widen or narrow. This double effect can make short term moves quite sharp, especially in stressed markets or in specialist sectors with fewer buyers. Some investors enjoy the chance to buy a trust at a wide discount in the hope it will narrow. Others find the extra swings uncomfortable.
Open ended funds usually only move with the value of the assets inside. There is no traded discount or pricing gap in normal conditions. That does not remove risk, but it simplifies it. If you prefer a holding where the price more closely tracks underlying assets, a fund may suit you more than a trust.
Do You Need Regular Income?
Many investment trusts have long records of rising dividends. Because they are allowed to hold back some income in strong years, they can draw on revenue reserves in leaner years to keep distributions steady. This smoothing feature has helped some trusts raise payouts year after year through market shocks.
Open ended income funds pass through most of the income they receive each year. That can make payouts more sensitive to swings in company dividends and bond coupons. For investors who want an inflation beating income stream that rises gradually, an equity income trust can appeal, though the higher volatility risk needs to be understood.
Investment Trusts Better Than Funds For Different Goals?
Once you understand the moving parts, you can match each structure to specific aims. In some cases an investment trust may be the stronger pick. In others, an open ended fund gives a smoother ride.
Long Term Growth
If you have a long time horizon and can accept bumps along the way, investment trusts that use modest gearing can work well for growth. The fixed capital structure allows the manager to hold onto favoured assets through short term noise. When discounts are wide, patient investors may also benefit if sentiment improves and discounts shrink.
Growth focused funds also suit long time horizons. A broad global equity fund can spread money across markets and sectors with lower charges than many actively managed trusts. Passive index funds, in particular, keep costs low and track a chosen benchmark with little need for monitoring of discounts or trading spreads.
Regular Saving And Smaller Contributions
For people starting out with monthly contributions, funds often feel more straightforward. Many platforms let you invest small sums each month into a range of funds with no dealing commission. Unit prices adjust to cover each contribution, so your money goes straight to work in the market without needing to think about bid ask spreads.
Regular saving into investment trusts is possible too, often through low cost dealing plans. That said, share dealing charges can bite hard on small trades unless your platform offers discounted fees for monthly plans. It can still work well if you focus on a small number of core trusts rather than frequent switches.
Specialist Or Illiquid Assets
Areas such as infrastructure, private equity, and smaller company shares can be harder to hold inside open ended funds. When lots of investors want to sell at the same time, the manager may struggle to raise cash without selling assets cheaply. Investment trusts do not face the same redemption pressure because their capital is fixed.
That means they are often used for specialist assets that trade less frequently. Open ended funds that hold these assets have faced challenges in stressed markets, and some have suspended dealing to avoid forced sales. If you want exposure to more specialist areas, a trust structure can often handle the liquidity risk more cleanly, though share price swings may still be large.
Costs, Tax, And Practical Details
Whichever route you choose, charges and tax treatment have a big effect on final outcomes. Both trusts and funds publish an ongoing charge figure that rolls together management fees and many operating costs. Trusts also bring dealing costs and the bid ask spread, while funds may have entry or exit fees on some share classes.
From a tax point of view, both can sit inside wrappers such as ISAs and pensions. Outside those wrappers, you may face capital gains tax on profits and income tax on distributions. Rules differ by country and change over time, so personal advice from a regulated planner can help you pick the right mix of holdings and wrappers for your own situation.
If you want to read more about how the UK shapes rules around collective schemes such as unit trusts, the HMRC stamp taxes shares manual on unit trust schemes gives a flavour of the legal structure behind many retail funds.
| Investor Priority | Structure That May Fit | Main Trade Off |
|---|---|---|
| Smoother pricing and simple dealing | Open ended fund | Less chance to buy at wide discounts |
| Potential for higher long term growth | Gearing friendly investment trust | Greater share price swings |
| Steady, rising income stream | Equity income investment trust | Dividend not guaranteed in tough markets |
| Regular small monthly contributions | Low cost open ended fund | Less flexible around trading during the day |
| Access to specialist illiquid assets | Closed ended trust structure | Discounts can widen sharply in stress |
| Lower ongoing fees and simple market exposure | Index tracking fund | No chance of outperformance versus the index |
| Willingness to hunt for value in discounts | Selection of discounted trusts | Requires patience and careful research |
How To Choose Between An Investment Trust And A Fund
To decide between an investment trust and a fund, start with your goal, time horizon, and tolerance for volatility. If sharp swings bother you and you just want a simple way to build wealth steadily, a diversified fund may be the better anchor. You can still add a small trust holding at the edges if a specialist theme appeals.
If you enjoy keeping an eye on markets, are happy to ride out discounts widening and narrowing, and like the idea of a fixed pool of capital backing your manager, investment trusts can sit at the centre of your plan. Many experienced investors blend both, using funds for broad markets and trusts for income and specialist themes.
Whatever you choose, treat both types as long term tools. Short term trading in either structure can rack up dealing costs and leave you exposed to short bursts of volatility. Decide how much risk you can carry, pick funds and trusts that match that profile, and review periodically against your goals rather than daily price moves.
Bringing It All Together
The question “are investment trusts better than funds?” only makes sense when linked to a real person with a real goal, time frame, and appetite for swings in value. Trusts can offer geared exposure, the chance to buy at discounts, and some strong long term dividend records. Funds tend to give smoother pricing, lower dealing frictions, and a simpler path for regular saving.
Instead of looking for a single winner, treat the structures as tools on the same shelf. Pick the right one for each job, understand the moving parts, and give each holding enough time to do its work. With a clear plan and realistic expectations, either route can help you grow and draw on your money over the years.