- April 25, 2020
The Ultimate Guide to Investment Trust
Investment trusts allow you to pool your money together with that of other investors to get access to a wide range of investments. In simple words, investment trusts are companies that invest in financial assets like shares and bonds on behalf of their investors.
Buying financial assets through investment trust is different from investing in shares and bonds of a public listed company. The latter is the case when you have purchased a share or bond of a company and get a share in profits or interest based on the revenues earned by the company. However, when you make investments through an investment trust, your money is pooled together with other investors and used to buy a different range of investments.
Investment trusts are supposed to be a better investment option than buying stocks of a single company not because it eliminates the risk, but because your money is pooled together and invested across different companies. It means not all investments will be performing poorly simultaneously.
Risks associated with investment trusts
Though your money is pooled together to invest in different forms of investments, it does not mean that they are not risky. Investment trusts are also as risky as any stock or share you buy of a public listed company.
The fluctuation in supply and demand can cause considerable risk to your investment. If the need for the investment goes down, the amount you will get after the sale will be much lower than that you paid to buy. The prices generally down if there are more sellers than the buyers.
However, you can limit the risk to your money if you work with the investment trust that invests in financial assets with low risk or that avoids gearing. Gearing is nothing but borrowing money to fund your investments. Investment trust managers often borrow money in addition to the money raised from investors to get better returns when they expect an increase in prices by increasing the total amount of funds to be invested.
Here are the two possibilities: if everything goes according to their expectations, they will earn a right amount of profits, and if things do not work as they thought, your investment will lose value as fast as anything.
Experts say that it is paramount to understand the market before deciding on gearing. It is good to opt for gearing when the market is rising. Otherwise, you will lose a hefty amount. The market is hugely fluctuating. It is not surprising that it seems growing until you invest money, and then immediately it drops down.
Geared investment trusts are not as stable as non-geared funds. If they have the potential to yield higher returns, they can also lead to more significant losses.
What is the difference between investment trusts and funds?
There is a significant structural difference between investment trusts and unit trusts (funds). The primary difference is the former is a closed-ended investment, which means a company issue a fixed number of shares that you can buy and sell on the stock market. At the same time, the latter is an open-ended investment that can issue and redeem stocks at any time so that you can buy and sell stocks at your stake.
Investment trust managers have a fixed amount of money for the redemption, and hence investment trusts consist of illiquid assets. It can provide the stability that is not possible with unit trusts.
Unlike unit trusts, you can invest the minimal amount with investment trust because you are not the sole investor. They will pool your money together with that of other investors. You can also go to the fund manager directly.
Investment trusts can give you higher returns than funds if the market is rising. It also has the flexibility of borrowing money to increase returns. However, it is associated with the risk. The returns will be much lower in case the market plummets.
Investment trusts are suitable for long-term investments. However, you can liquidate unit funds at any time when you wish.
Investment trusts are going mainstream nowadays. It is an excellent way to earn revenues. If you are looking forward to building long-term investments, you should invest with investment trusts. You can also take out unsecured business loans in the UK to make investments.