Closed-ended and open-ended funds each have their place but they have different features and behave in different ways.
When a fund is open-ended there is no limit to the number of units available.
As more people invest, more units are created. This means that the price is driven entirely by the changes in the underlying value of the investments.
Richard Pursglove, head of distribution at Sanlam says: “The value of an open ended investment company (Oeic) fund is determined by the value of the underlying assets.
“In simple terms, if you have a £100m and you have 100m shares in issue, then the price of each of those shares is a pound.
“The value of a closed-ended structure, aka an investment trust is determined by the supply and demand for those stocks and shares in the market in exactly the same way as the price of an equity is determined by the market”
With a closed-ended investment trust there is a finite number of shares available, which means their price is not just determined by their value, known as the net asset value or NAV, it is affected by supply and demand too.
If shares in the trust are in high demand, the shares will trade at a price in excess of the NAV. This is what is known as trading at a premium.
If the shares are not in such great demand they will trade at a price below the NAV, in which case they are said to be trading at a discount.
Steven Lloyd, Investment Director at Ascot Lloyd, says: “Another important difference is that investment trusts are companies in their own right.
“This means they are not bound by the same investment rules as unit trusts, giving fund managers much more flexibility.
“For example, fund managers on investment trusts are able to gear - that is they are able to borrow to invest.
"They are also able to smooth out returns for investors by holding back up to 15 per cent of their income in good years to bolster returns in the bad.
"As a result, investment trusts have a good track record for increasing dividend payments year after year.”
This ability to borrow money and gear up the portfolio is one of the key differentiators for an investment trust.
The level of gearing that is available to an investment trust is normally articulated in the articles of association that goes with the investment trust.
Mr Pursglove says: “They will be normally stated limits on how much they can borrow and what this means for the manager.
“If they feel for instance there is a lot of value in the asset class they are investing in, they are able to borrow money to provide gearing for the portfolio.
"That is not ordinarily the case for an Oeic which would not have any borrowing powers at all.”