What is an investment trust? The basics

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

On the face of it, an investment trust is just like any other fund. Look under the hood though and they operate a little differently. This is because they’re a ‘closed-ended’ vehicle, meaning there’s a fixed number of shares (unless the board issues more or buys some back), so the trust doesn’t have to sell off some of its investments every time someone wants to cash in their holding.

If you invest in an investment trust then your money is taken, pooled with that of other investors and used to buy shares in other companies (or other assets). Because it’s structured as a PLC, you own a share of that company, rather than a unit of a fund.

They also have a board of directors (including independent non-execs), just like any other PLC, which adds an extra layer of governance.

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What are the benefits?

One benefit of investment trusts is that, as funds, they are generally understood to be lower risk than buying individual stocks. This is because they invest in a range of holdings and so underperformance of one asset shouldn’t hurt the performance of your portfolio as much.

They are managed by a fund manager who will be analysing the market and making investment decisions on your behalf. In theory this means they could ‘beat’ the market and boost your returns.

Some trusts have access to investments that you would not otherwise be able to buy, such as unlisted companies. This could boost returns.

What do trusts invest in?

Trusts can invest in a range of assets. This could include stocks and shares, fixed-income securities (otherwise known as bonds) or even property.

The trust will publish information about its objectives so you can understand where your money could end up.  Be sure to read the trust’s fact sheet and annual report - they’ll show you exactly what kinds of investments the trust holds, how much it’s borrowed (its “gearing,” which can be used to try to boost returns but also increases risk), and whether its shares usually trade above or below the value of its underlying assets (its discount or premium history).

How can I buy an investment trust?

Most investment trusts are available via platforms in the same way as any other funds or stocks. Its shares will be priced according to demand, so popular trusts will be more expensive to purchase.

Looking at the “net asset value” can help you choose. This is the underlying value of the holdings in the trust. If its shares are priced above the NAV then it is said to be trading at a “premium” – a sign of its popularity – while shares priced below the NAV are trading at a discount.

Persistent wide discounts can signal poor governance or low appetite, but many boards run discount-management programmes (buying back their own shares to address a discount or issuing shares to address a premium).

• Find out more about Fidelity Investment Trusts and use our Investment Finder

Are there costs?

The trust’s manager will usually charge annual management fees. There could also be a performance fee which will kick in if it outperforms a given benchmark.

• Read: Investing vs saving: the basics
• Read: Cash ISA versus Stocks and Shares ISA
• Read: 6 habits of successful investors