Understanding Investment Trusts: A Comprehensive Guide

Investment trusts are a popular investment option for individuals looking to grow their wealth and achieve long-term financial goals. In this comprehensive guide, we will explain what investment trusts are, how they work, and highlight some of the benefits they can offer investors.

What is an Investment Trust?

An investment trust is a company with a fixed number of shares that makes investments on behalf of shareholders. Unlike other investment options like unit trusts or open-ended investment companies (OEICs), investment trusts are quoted companies listed on the Stock Exchange.

How Investment Trusts Work

Investment trusts pool money from multiple investors to create a diverse portfolio of assets such as stocks, bonds, and other securities. The trust is managed by a professional fund manager who makes investment decisions on behalf of the shareholders. The trust's performance is directly linked to the performance of the underlying assets.

How do Investment Trusts Compare with Unit Trusts?

Investment trusts differ from unit trusts in several ways. While unit trusts have an unlimited number of units, investment trusts have a fixed number of shares. Additionally, investment trusts can borrow money to invest, a practice known as gearing. Unit trusts, on the other hand, cannot borrow money.

What Can Investment Trusts Offer?

Investment trusts offer several benefits to investors:

• Easy access: Investment trusts are traded on the Stock Exchange, providing investors with easy access to buy and sell shares.
• Simplicity: Investment trusts are simple to understand and transparent, making them suitable for both experienced and novice investors.
• Income potential: Some investment trusts focus on generating income by investing in assets that provide regular dividend payments.
• Gearing: Investment trusts have the ability to borrow money to invest, which can potentially enhance returns but also increase risks.
• Accountability: Investment trusts have a board of directors responsible for overseeing the fund manager's performance and ensuring the trust operates in the best interest of shareholders.

1,000 Stories in Every Trust

Each investment trust represents a unique investment opportunity, with its own portfolio of assets and investment strategy. This diversity allows investors to choose investment trusts that align with their individual investment goals and risk tolerance.

Explore More Topics

Investment trusts cover a wide range of investment sectors and themes. Some investment trusts focus on specific geographic regions, while others specialize in certain industries or asset classes. Exploring different topics can help investors uncover new opportunities and diversify their investment portfolios.

How Can I Invest in an Investment Trust?

Investing in an investment trust is simple. Shares of investment trusts can be purchased through a stockbroker or an online investment platform. It's important to do thorough research and consider your investment goals before investing in a specific trust.

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

Yes, investment trusts are eligible investments for Individual Savings Accounts (ISAs). Investing through an ISA can provide tax advantages, such as tax-free dividends and capital gains.

Will I Have to Pay a Fee?

Investment trusts charge fees for managing the trust, which are typically deducted from the trust's assets. These fees, known as management fees, cover the costs of the fund manager, administration, and other operational expenses.

Do I Get Dividends and When?

Investment trusts can distribute dividends to their shareholders. The frequency and amount of dividends vary among investment trusts and are determined by the trust's investment strategy and performance.

How Can I Sell an Investment Trust?

Investment trust shares can be sold on the Stock Exchange through a stockbroker or an online investment platform. The price at which the shares are sold will depend on the demand and supply in the market.

What is the Role of a Fund Manager?

The fund manager is responsible for making investment decisions on behalf of the investment trust. They analyze market trends, research potential investment opportunities, and manage the trust's portfolio of assets to achieve the trust's investment objectives.

What is the Role of the Board of Directors?

The board of directors oversees the activities of the investment trust and ensures that the fund manager operates in the best interest of the shareholders. They provide guidance and supervision to the fund manager, and their primary responsibility is to protect the interests of the shareholders.

What is Gearing?

Gearing refers to the practice of borrowing money to invest. Investment trusts have the ability to borrow money, which can potentially enhance returns when markets are performing well. However, gearing also increases the risk of losses when markets are declining.

What is NAV?

Net Asset Value (NAV) is the total value of the investment trust's assets minus its liabilities. It represents the intrinsic value of the trust's shares and is calculated on a per-share basis.

What are Premiums and Discounts?

Investment trusts are traded on the Stock Exchange, and their share prices can trade at a premium or a discount to their NAV. A premium means the share price is higher than the NAV, while a discount means the share price is lower than the NAV.

What are the Risks Associated with an Investment Trust?

Investment trusts, like any investment, come with risks. The value of the trust's assets can fluctuate due to changes in market conditions, and there is no guarantee of returns. Additionally, investment trusts are subject to liquidity risk, which means it may be difficult to sell shares if there is low demand in the market.

How Can I Monitor an Investment Trust?

Investors can monitor their investment trust by reviewing regular updates and reports provided by the trust. This information includes the trust's performance, holdings, and any changes to the investment strategy. It's important to stay informed and regularly assess the trust's performance in relation to your investment goals.