In short, Investment trusts are offered by mutual fund companies and are also known as closed-end funds (CEFs). They’re different from mutual funds in several key ways, but there are still many similarities, too.
That’s why it’s important to know how an investment trust works before you invest in one. In this article, we will examine exactly what an investment trust is and what makes it unique in comparison to its cousin the mutual fund so that you can make an informed decision about whether or not to invest with one.
How do investment trusts work?
A lot of people think investment trusts are like mutual funds. That’s why we wanted to explain what an investment trust actually is, how it works and how you can use it to your advantage.
We’ll also provide tips on picking a good one to invest in. Let’s start with a quick explanation of what investment trusts are, who owns them and why they exist.
Who invests in investment trusts
There are two main types of investors who invest in investment trusts: accredited investors and non-accredited investors.
Accredited investors are typically high net worth individuals, but not always; to be an accredited investor you must either have a personal income of over $200,000 for a single person or $300,000 for married couples filing jointly or hold assets in excess of $1 million excluding personal property that’s used as collateral for loans.
Non-accredited investors include most anyone else.
Why invest in investment trusts
If you want to put your money into stocks or shares, but don’t have much to spend, an investment trust could be a good option.
With investment trusts, investors pool their money together to buy a portfolio of investments such as company shares and bonds, rather than just investing on their own.
Investors then receive a share of any income these investments generate in return for their capital. In essence, they get more bang for their buck (and pay less tax while they’re at it).
It is estimated that 80% of UK funds are made up of some form of collective investment vehicle such as investment trusts (but there are also unit trusts), with around £7 billion invested in them between January and March 2019 alone.
Which are the top 10 most profitable investment trusts?
The most profitable investment trusts are interesting to analyse due to their success as measured by profitability. However, it is important to point out that short-term returns on investment are not necessarily indicative of long-term performance.
Every investor should weigh up risk versus reward when deciding whether or not a particular investment is right for them; looking at a fund’s previous 10 years of performance may help in understanding long-term trends and patterns, but short-term volatility could have an entirely different reason.
Ultimately, you need to decide whether that drop in value was part of normal fluctuations or if there was some kind of underlying cause.
Are there ongoing business problems which need sorting out (and are therefore likely to lead to drops further down the line), or did something external happen which is no longer relevant?
Similarly, there needs to be a methodical approach towards picking your investments – it doesn’t make sense just sticking your money into anything which looks like its doing well because it very well might be doing so because of unsustainable factors or even luck (there will always be exceptions).
In general terms: they offer varying levels of risk and reward depending on your time horizon – with short-term exposure being more risky than longer term ones.
The best performing funds by assets - who are they and how much profit have they made you?
At any given time there are thousands of investment trusts to choose from. But with over 1,200 currently in operation, how do you choose which ones to invest in? All investments carry risk and many aren't what they seem.
Many investors think they’re getting exposure to stocks when they’re actually investing in bonds. Before you make an investment decision, it’s important to fully understand a fund’s objective so that you can spot any areas of potential risk and also maximise your returns from each investment.
Here we take a look at some of the best performing investment trusts by assets under management (AUM). We include their performance data over five years and ten years alongside key facts about each fund so that you can see exactly how they operate.
Investment trust mergers, acquisitions and de-mergers explained
Acquisition, mergers and demergers are common in business life. These are where one company buys another or two companies combine to form a larger company.
A trust is usually created when one of these situations occurs to allow the shares of a company to be traded publicly.
Merger: Two companies that want to form one larger company come together and share all their assets.
The shareholders of both companies exchange their shares for stock in a new holding vehicle called an investment trust, which then owns both businesses as subsidiaries.
Uncover the risks of investing in investment trusts
The major risks with investment trusts are twofold: their value might be volatile, and they may not be able to meet your specific financial needs.
It's important to talk with a financial advisor about what kind of investor you are and find out if investment trusts will work for you.
A lot of people go into investing without a plan and end up losing money due to poorly planned investments. When using investment trusts, it's also essential that you do research on where your money is going and make sure that you have access to reports on what your investments are doing.
If a trust doesn't offer these features, then it might not be worth using one in your strategy for savings.
Best investment tips for new investors
Investing can be intimidating, but it doesn’t have to be. Sure, there are a lot of investment vehicles to choose from and knowing which one is right for you might be tough, but building your knowledge is key to overcoming any barriers that might crop up along your journey.
Here are some of our favorite tips for helping new investors get started on their path to success. 1) Start out with a diverse portfolio and balance risk: Too many people look at investing as an either/or situation—either I do it or I don’t. While there's no reason why you can't eventually take a more aggressive approach toward investing, getting started with an all-in strategy may set you up for failure later on down the road.