Investment Trusts

Understanding Investment Trusts

  • An investment trust is a form of collective investment, which pools money from numerous investors to buy and manage a diversified portfolio of assets.
  • Unlike unit trusts, investment trusts are publicly listed companies, meaning their shares are traded on the stock market.
  • Investors can gain exposure to a wide range of assets including shares, bonds, and property by buying shares in these trusts.

Role of Investment Trusts in Financial Planning

  • Investment trusts offer a way to access a diversified portfolio with a small initial investment, making them suitable for those with limited capital.
  • By providing exposure to a broad range of assets, they can help reduce risk and potentially enhance returns in a balanced investment strategy.
  • Investment trusts can help generate both capital appreciation and income, supporting both short-term and long-term financial goals.

Factors Affecting Investment Trusts

  • The performance of investment trusts is related to the performance of the underlying assets in their portfolio.
  • Market trends, economic conditions, political instability, and sector-specific factors can influence the value of these assets.
  • Supply and demand dynamics for the trust’s shares on the stock market can also impact their price separate to the value of the underlying investments, leading to the shares trading at a discount or premium to the net asset value.

Investment Trusts Risks

  • Investment risk is inherent with investment trusts, as the value of underlying assets can go up or down.
  • Market volatility can lead to fluctuations in the trust’s share price, even when the value of the underlying assets remains stable.
  • The use of borrowing, known as gearing, can enhance returns when the underlying assets perform well, but can also amplify losses.

Mitigating Investment Trust Risks

  • Diversification is a key risk mitigation strategy for investment trusts, achieved by investing in a broad mix of assets.
  • Stick to investment trusts managed by reputable companies with a proven record of solid performance.
  • Regular monitoring and rebalancing of the investment portfolio can help manage and reduce risks.