Learn About Investing

Learn About Investing

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What types of fund are there?

This article is about investing in general, not about Orbis Access in particular.

Types of investment funds

Similar yet different

Investment funds come in different legal shapes. Unit trusts and Open-ended Investment Companies (OEICs ) are most common. Another type, which has become popular more recently, is the Exchange Traded Fund (ETF).

Generally, unit trusts and OEICs can only be bought or sold once a day. If you miss the deadline to buy or sell, you have to wait until the next day. ETFs by contrast can be traded any time the market is open, much like individual company shares listed on stock-exchanges.

These types of fund all share the same basic principles and are examples of ‘open ended’ funds. These can create more shares when more people invest in the fund, or cancel shares when people sell up.

Investors in OEICs or Unit Trusts are actually investing in a pool of assets, managed by the fund manager. In financial jargon, the total value of assets being invested by the fund is called the Net Asset Value (NAV).

If you take an OEIC’s share price at any point, and multiply it by the total number of its shares in circulation, the resulting figure will reflect NAV. The same principle goes for Unit Trusts.

Perhaps surprisingly, not all investment vehicles are worth the same amount as the value of assets they hold. In addition 2,500 funds available in the UK, there are around 400 Investment Trusts which are similar to funds in some ways, but there are important differences.

Notably, Investment Trusts are 'closed-ended' funds. These differ in that they generally have a fixed number of shares. These shares can then be traded, at which point their combined value can and does deviate from NAV. Investment trusts are set up as UK plc’s and obtain an official listing on the stockmarket so that they can be bought and sold by members of the public in the UK in the same way that they can buy and sell shares in other listed companies.

As they are bought and sold on the market, closed-end fund shares may be sold at a 'discount' (when the combined value of the shares issued by fund is less than NAV) or at a 'premium’'(when the combined value of the fund shares exceeds the NAV).

These variances may be explained by expectations related to the future performance of the fund. If an Investment Trust is tipped to outperform the market in future, it may trade at a ‘premium’ or vice-versa. So, as well as volatility related to the underlying investments, there is the volatility of the Investment Trust shares themselves to consider.