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What Is An Investment Trust and Is It Worth It?

An investment trust is a type of collective investment; they allow multiple investors to combine their money which opens up a wide variety of assets that wouldn’t otherwise be available to a lone investor. Wanting to get the best possible return with as little risk as possible is the ideal investment scenario, especially during uncertain economic times. But are investment trusts still worth it?

This does not constitute advice and advice should be sought in all instances before acting on it.

Investment trusts aren’t new, rather, they’re more of a well-kept secret amongst those in the know. Recently, due to changes to fee structures, their appeal as a low-fee, high return option has greatly reduced.

Despite this unfortunate change, they still provide more options for investment, which means you can mitigate your risk by allocating your funds across multiple companies through just one investment.

It’s important to remember though that while this may alleviate some of the risk, there still is some risk, the severity of which depends on the final assets the trust decides to investment in. 

More about investment trusts

These trusts are actually structured as companies and are traded on the London Stock Exchange (LSE) so when you invest in one, you become a shareholder. As a fully-fledged company, a trust must produce annual reports and account audits and they have a board of directors that ensures trust managers act responsibly.

This also means that, as a shareholder, you are eligible to receive dividends, which are an excellent source of extra income. Share prices in an investment trust can either trade at a discount or a premium.

Unit vs investment trusts

A unit trust is similar to an investment trust; they are a collective investment managed by a financial professional and open up more investment options.

Generally speaking, investment trusts have more leeway than unit trusts, letting them borrow funds for shares more freely. Though the additional purchasing power can often help to yield favourable returns, it won’t always, so be prepared to feel the sting of losing money as well as the high of profit gain.

Unit and investment trusts operate differently as well; they are open-ended investments while investment trusts are closed-ended. Unit trusts can supply or exchange units whenever an investor wants to get into or out of the fund, sometimes necessitating the sale of assets to compensate for the loss.

An investment trust operates with a finite amount of shares so one must find a replacement investor if they wish to sell their shares, usually achieved by a stock market sale.

Fund managers are also not required to recoup shares before the trust winds up. Not having to worry about a sudden loss if another shareholder wants to sell their shares provides a degree of security – a definitive advantage over unit trusts.

Are investment trusts worth it?

According to a 2017 study, over the last 15 years, investment trusts seem to have the definite edge overunit trusts. Among the benefits are the borrowing freedom investment trusts are allowed, a closed-ended structure that is safer, and slightly lower costs compared to a unit trust.

If you’re considering involvement in an investment fund, we’re here to help.

Our financial experts will provide guidance on incorporating your investments into a cohesive financial plan that allows you to reach your personal and professional goals.

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