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Investment Trusts

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Investment trusts are financial vehicles that pool funds from investors.  They then invest that capital into a diversified portfolio of stocks, bonds, or other securities. An investment trust will typically be aligned with a geographical region or sector and a benchmark index.

Unlike mutual funds, investment trusts are structured as closed-end funds.  This means that they have a fixed number of shares to be bought and sold. The fixed limit means investment trusts trade at a premium or discount to their net asset value (NAV), depdnding on demand.  Higher demand means a higher premium; lower demand means more discount.

Investment trusts are managed by professional fund managers or investment companies who use asset allocation and stock selection to achieve the fund’s objectives.

The primary objective of an investment trust is to generate returns for its shareholders through a combination of capital appreciation and income generation.

Investment trusts often distribute income generated from their investments to shareholders in the form of dividends. Shareholders can either reinvest these dividends to acquire more shares or receive them as cash.

The closed-end structure, combined with active management and the potential for leverage, makes investment trusts suitable for investors seeking exposure to a diversified range of assets within the objectives of the investment fund with the potential for capital appreciation and income generation.

A stock represents ownership in a single company, entitling the holder to a share of that company’s profits and voting rights. In contrast, an investment trust is a pooled investment fund that owns a diversified portfolio of stocks, bonds, or other assets. While stocks are individual equity securities, investment trusts are closed-end funds traded on the stock exchange.

Investment funds offer diversification benefits and professional management, while stocks are more focused on the performance of a specific company. Additionally, investment trusts may use leverage and can trade at a premium or discount to their net asset value.

There is no definitive answer on whether investment trusts are better than funds, as it depends on individual investor preferences and goals. Investment trusts offer potential advantages like closed-end structures, active management, and the ability to trade at a premium or discount. However, they may also carry higher risks due to the use of leverage.

Funds, such as mutual funds or exchange-traded funds (ETFs), often provide diversification, liquidity, and lower fees, making them suitable for some investors. The choice between investment trusts and funds should align with an investor’s risk tolerance, investment strategy, and specific financial objectives.

Selecting an investment trust involves careful consideration of your financial goals, risk tolerance, and investment time horizon. Here’s a guide to help you choose an investment trust:

  1. Define Your Goals: Clearly identify your investment objectives, whether it’s capital appreciation, income generation, or a combination of both.
  2. Risk Tolerance: Assess your risk tolerance to determine the level of volatility and potential losses you are comfortable with. Investment funds can vary in risk depending on factors such as asset allocation and leverage.
  3. Research: Conduct thorough research on potential investment funds. Examine their historical performance, fund manager’s track record, and the underlying assets in their portfolio. Websites like Trustnet, Citywire and Morningstar are useful resources.
  4. Diversification: Look for trusts with diversified portfolios across different sectors and regions. Diversification helps spread risk and reduces the impact of poor performance in any single investment.
  5. Costs and Fees: Consider the costs associated with the investment fund, including management fees and other expenses. Lower fees can enhance your overall returns.
  6. Premium or Discount: Check whether the investment fund is trading at a premium or discount to its net asset value (NAV). A discount might present a buying opportunity, while a premium could indicate market optimism.
  7. Manager Expertise: Evaluate the expertise and reputation of the fund manager. A skilled and experienced manager can significantly impact the trust’s performance.
  8. Dividend Policy: If income is important, assess the trust’s dividend history and policy. Some investment funds focus on income generation through regular dividend payments.
  9. Leverage: Understand if the trust uses leverage and evaluate your comfort level with the additional risk associated with borrowed funds.
  10. Reviews and Ratings: Consider professional reviews, ratings, and recommendations from reputable sources to gain insights into the trust’s reputation and performance.

If in doubt, you should consider consulting with a financial advisor before making investment decisions, and ensure your choices align with your overall financial plan and investment strategy.

To buy investment trusts, follow these steps:

  1. Research: Identify the investment trust(s) that align with your financial goals and risk tolerance.
  2. Open an account with an Investment Platform: Choose a reputable investment platform to facilitate your transactions. If you are a UK resident, check out our stocks and shares ISA platform comparison.  
  3. Fund Your Account: Deposit the required funds into your brokerage account. Bear in mind the minimum amount will vary from platform to platform.
  4. Place an Order: Use the investment platform to place buy orders for the desired investment trust(s).
  5. Specify Quantity: Indicate the number of shares you want to purchase.

You will be able to monitor your investment and make adjustments where you need to. However, it is important to bear in mind you investment strategy and goals. Investing in Investment Trusts suits those with a longer term objective.

The Association of Investment CompaniesInvestment trusts, also known as investment companies, make it easy for you to invest all over the world in a wide range of assets. The Association of Investment Companies (AIC) represents 350 investment trusts. On the AIC website, you’ll find lots of tools and resources to help you start your investment trust journey. You can compare investment companies or sign up to their monthly newsletter

What are Investment Trusts?

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