Gaining prudent exposure to stock exchange investment without putting all your eggs in one basket

Investment trusts are a way of gaining prudent exposure to stock exchange investment but without putting all your eggs in one basket. They are often categorised into country and regional funds and sub-divided further into funds that invest only in certain industry sectors. Investment objectives

 

With their long-term approach, usually low charges and wide choice of investment objectives, investment trusts and investment companies could be used to: grow your wealth; repay a mortgage; build a retirement fund and provide income in retirement; invest for children and grandchildren to pay for school fees, university or a better start in adult life.

Long track record

Investment trusts and investment companies have a long track record of helping people to achieve their investment goals, whether it is for income, capital growth or both. They allow investors to pool their money together and spread the risk.

The easiest way to understand investment trusts is to think of them as a company, because that is exactly what they are. Just like any other company, they issue shares to raise money from shareholders and then invest that money.

Shares of other companies

The difference between investment trusts and normal ‘trading’ companies is that investment trusts invest their money in the shares of other companies, rather than in physical assets such as factories or mobile phone networks. Since they are like a company, they are also able to borrow money to invest. However, only a few take advantage of this to any significant extent.

Investment trusts are often referred to as ‘closed-ended funds’. Like ordinary companies, they have a set number of shares in existence (although they do occasionally issue more or buy some back).

Net asset value

The value of all types of investment fund is made by reference to their net asset value (NAV) per share or unit. This net asset value per share is basically the total value of the trust’s portfolio of investments divided by the total number of its own shares or units.

Investment trust shares are traded on the stock market just like those of any other company and so their prices can change on a minute-by-minute basis, according to how many shares investors are buying and selling.

Trading at a discount

Investment trusts calculate their ‘net asset value per share’ at regular intervals. Their share prices tend to trade at a discount to their net asset value. There are a variety of reasons for this. One reason is that you could buy the same portfolio of shares yourself directly in the market, without suffering the ongoing management charge.

These discounts make investment trusts slightly more risky, since the value of your investment is affected by the amount that the ‘discount to NAV’ changes during the period of your investment, as well as the performance of the assets they hold.