What are Investment Trusts?

Investment Trusts are a type of investment scheme, which are managed by an investment company. It allows investment to invest in shares within companies chosen by the trust board and fund managers. Investors purchase shares within the investment trust, which are in turn invested on their behalf.

An investment trust is set up with a fixed amount that makes up the trust total. This is the total amount that will be invested between all those wishing to take part. This full amount is then split into shares, which investors can then purchase. Once all these shares have been sold the total fund amount is invested in other companies’. Investors can by any number of shares they like, from one to several.

A board with a fund manager run the scheme on behalf of the investors. They will decide which stocks and shares the fund is invested in. This is out of the hands of the investors themselves; they are affectively intrusting the board and fund manager to choose the best investment products possible. These will usually be spread over a number of products, so everything is not put towards one thing. This reduces the risk as not everything will be lost due to one poor decision or one unexpected fall in shares.

There are a number of advantages to investment trusts compared to people investing alone. It is a collective investment between many people, meaning more can be invested in total. The increased total amount reduces the risk as opposed to one individual investing the same amount all by themselves. And the more that is invested, the more the potential returns are. In comparison with other investment opportunities it is a relatively cheap way for people to invest in the stock market. It is managed by experts, who are experienced at what they do and know how different markets work. Of course nothing is full proof but this is one of the reasons many people, especially those without the same level of expertise, choose to invest in this way. It is advantageous for those who lack the confidence to make investment decisions themselves.

Investment trusts may not be ideal for those who like to make their own investment decisions. As it is managed by the board and fund managers, the investments chosen are out of the hands of those who are actually investing the money. As mentioned above, there can be benefits to this, but others prefer to have more of a say.

Andrew Marshall (c)