In the tax year 2017–2018 the ISA allowance has been increased to £20,000 so it is likely that both new and established investors will think about investing in funds. As the title of this post suggests, there are two different types of fund, though I should clarify that the terms above are those used in the USA, rather than in the UK, as I believe these make a clearer distinction of the difference between them.

In the UK we use the terms ‘Unit Trust funds’ or ‘Open-ended Investment Companies’ to refer to open-end funds, and ‘Investment Trusts’ to refer to closed-end.

An open-end fund (OEF) has no restrictions on the number of shares that can be issued –every time a new investor or returning investor wants to invest in the fund new shares are issued. The pricing of an OEF takes place once a day and the price is based on the net asset value of the shares, which is calculated as follows:

Total fund assets less liabilities divided by the number of shares issued less any costs.

When shares are sold by an investor they are taken out of circulation. It is up to the investment manager when they feel that the amount of money invested in the fund is sufficient or the fund is becoming too large; they just stop further investment by closing it to new investors and even, in extreme cases, to existing investors.

A closed-end fund (CEF) has a different legal structure to an OEF. It is a public limited company quoted on the London Stock Exchange. It makes an initial public offering of shares to which investors subscribe and a fixed number of shares are issued. These shares are traded on the stock exchange like any other public company. The investment manager makes his decisions about the investments secure in the knowledge that the total fund is available at all times and is not likely to change on a daily basis. The price of the fund on the exchange fluctuates according to supply and demand for the shares, which is in turn a reflection of the demand for the underlying investments. The price of the shares will vary during market trading hours and may be at a premium or a discount to their net asset value depending on demand for the shares.

The similarities between the funds are that they are both run by investment managers who are backed up by a team of analysts; they both pay dividends and charge a management fee; and they both offer diversification within a given sector of the investment market.

The above is a very brief introduction to the topic to give you a bit of background to the funds themselves; I will be covering the reasons to invest in each in greater detail in my next post and outline their advantages and disadvantages. When is it better to use a CEF in preference to an OEF, for example? Which have better performance when comparing an OEF and a CEF, both invested in Europe? All will be revealed in a couple of weeks’ time.

 

Archiemidas
This article is not to be construed as financial advice. The views expressed above are those of the writer and do not constitute a recommendation to purchase, hold or sell. It must be borne in mind that the value of investments and any income will fluctuate. The value of your investment can fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to future returns.