Understanding Investment Trust Funds: A Comprehensive Guide

Investment trust funds are a popular investment vehicle that offer a range of benefits to investors. In this comprehensive guide, we will explain what investment trust funds are, how they work, and highlight some of the key benefits they can offer.

What is an Investment Trust?

An investment trust is a type of pooled investment that operates as a quoted company and is listed on the Stock Exchange. Unlike unit trusts or open-ended investment companies (OEICs), investment trusts have a fixed number of shares.

Easy Access and Simplicity

Investment trusts offer easy access to a diversified portfolio of assets. They are professionally managed by a fund manager, who makes investment decisions on behalf of shareholders. This provides individual investors with the opportunity to access a wide range of investments in a simple and convenient way.

Income Potential and Gearing

One of the key benefits of investment trusts is their potential to generate income. Investment trusts can invest in income-producing assets such as stocks, bonds, and real estate investment trusts (REITs). This allows investors to potentially receive a steady stream of payments.

Accountability and Monitoring

Investment trusts are governed by a board of directors, who are responsible for overseeing the fund manager's activities and ensuring that the interests of shareholders are protected. This provides an additional layer of accountability and transparency.

How Do Investment Trusts Compare with Unit Trusts?

Investment trusts differ from unit trusts in several ways. Unlike investment trusts, unit trusts have an open-ended structure and can create or redeem units based on investor demand. Additionally, investment trusts are listed on the Stock Exchange, while unit trusts are not.

What Can Investment Trusts Offer?

Investment trusts offer a range of benefits to investors, including:

• Access to a diversified portfolio of assets
• Potential for income generation
• Professional management by a fund manager
• Ability to trade at a discount or premium
• Regular cash flow for investors

How Can I Invest in an Investment Trust?

Investing in an investment trust is relatively straightforward. You can purchase shares of an investment trust through a stockbroker or an online investment platform. Before investing, it is important to conduct thorough research and consider your investment goals and risk tolerance.

Can I Use My ISA Allowance to Invest in an Investment Trust?

Yes, you can use your ISA (Individual Savings Account) allowance to invest in an investment trust. Investing through an ISA can provide tax advantages, such as tax-free growth and income.

Will I Have to Pay a Fee?

Yes, investing in an investment trust typically involves paying fees. These fees may include an initial charge, an annual management fee, and other transactional costs. It is important to carefully review the fee structure before making an investment.

Do I Get Dividends and When?

Investment trusts may distribute dividends to shareholders. The frequency and amount of dividends can vary depending on the investment trust. Dividends are typically paid out on a regular basis, such as quarterly or semi-annually.

How Can I Sell an Investment Trust?

You can sell your investment trust shares through a stockbroker or an online investment platform. The price at which you sell your shares may be higher or lower than the price at which you purchased them, depending on market conditions.

What is the Role of a Fund Manager?

A fund manager is responsible for making investment decisions on behalf of the investment trust. They conduct research, analyze market trends, and manage the portfolio of assets to generate returns for shareholders.

What is the Role of the Board of Directors?

The board of directors is responsible for overseeing the activities of the investment trust and ensuring that the fund manager operates in the best interests of shareholders. They provide governance and accountability.

What is Gearing?

Gearing refers to the practice of borrowing money to invest in additional assets. Investment trusts can use gearing to enhance returns, but it also increases the level of risk. It is important to consider the level of gearing when evaluating an investment trust.

What is NAV?

NAV stands for Net Asset Value. It is the value of the investment trust's assets minus any liabilities. NAV is typically calculated on a per-share basis and is used to determine the value of the investment trust's shares.

What Are Premiums and Discounts?

Premiums and discounts refer to the difference between the market price of an investment trust's shares and its NAV. If the market price is higher than the NAV, the investment trust is said to be trading at a premium. If the market price is lower than the NAV, it is trading at a discount.

What Are the Risks Associated with an Investment Trust?

Like any investment, investment trusts come with a certain level of risk. These risks can include market volatility, investment performance, and liquidity. It is important to carefully consider these risks before making an investment.

How Can I Monitor an Investment Trust?

There are several ways to monitor an investment trust. You can review the investment trust's performance reports, financial statements, and any updates or announcements from the board of directors. Additionally, online investment platforms often provide tools and resources to monitor your investments.

In conclusion, investment trust funds offer a range of benefits to investors, including easy access, income potential, and accountability. By understanding how investment trusts work and considering the risks involved, investors can make informed decisions and potentially achieve their investment goals.