An investment trust at its simplest is basically another type of fund – like a unit trust or open-ended investment company (OEIC) – in that it's a type of pooled investment. They pool together the money of investors and use it to buy and manage a portfolio of assets on their behalf.
Remember, investments can go down as well as up, and you could get back less than you invest.
Here, we look at:
How does an investment trust work?
Investment trusts vs unit trusts and OEICs
Investment trusts have been around for 150 years. They use money from investors to buy and manage a portfolio of assets, such as shares, bonds, or property.
They’re listed on stock markets so you can see their share prices rise or fall on a daily basis, just like shares in individual companies.
Because an investment trust is set up as a company, it also has a board of directors who oversee the operation of the fund managers.
Investment trusts have key differences from other types of funds like unit trusts and OEICs.
Some things to consider include:
Investment trust fees tend to be lower than those for a unit trust or OEIC.
Investment trust boards can hold back up to 15% of the income from the underlying assets in a year. This can be used to top up dividends for investors during low-performing years and potentially make income payments more consistent.
Unlike an OEIC or unit trust, investment trusts are closed-ended, which means there are a fixed number of shares available.
The value of shares in an investment trust can go up or down based on demand for them, sometimes resulting in a discount or premium to the value of the underlying investments in the trust. Whereas unit trusts and OEICs are open-ended and issue new units or shares based on demand.
Because investment trusts have a fixed number of shares and are publicly listed, they can borrow money to make additional investments that they think will increase their potential for long-term growth.
You can hold investment trusts, unit trusts and OEICs inside an ISA to shelter your money from tax up to a certain limit.
Keep in mind – tax rules can change, and any benefits will depend on your circumstances.
All investments carry a degree of risk, regardless of whether you opt for an investment trust, unit trust, or another type of fund.
Investment trusts are considered to be slightly riskier than other types of funds, such as unit trusts. This is because more variables can affect the value of your investment.
The share price in an investment trust will depend on:
They can also borrow money to invest in assets, which means any losses can be larger if the value of those assets falls.
It’s important to understand investment risk and how to manage it before making any decisions.
If you feel confident making your own choices, investment trusts could be something to consider.
To invest in an investment trust and buy and sell shares online, you can open one of our InvestDirect share dealing accounts. It allows you to trade UK government bonds, investment trusts, and a range of UK-listed exchange traded funds.
Alternatively, if you’re new to investing and unsure which investment trust or fund would suit your circumstances, you could consider a ready-made portfolio. These hold a mix of investments chosen and managed on your behalf.
You could also benefit from financial advice on how to find the right investments for you.
Eligibility criteria and fees apply.
If you think you might need support before making an investment decision, we can help you get specialist investment support.
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