Investing in an investment trust can be a strategic way to diversify your portfolio and potentially achieve significant returns. Investment trusts are publicly listed companies that invest in a variety of assets, including stocks, bonds, and property. They are managed by professional fund managers, offering investors access to a broad range of investments through a single vehicle. In this guide, we will walk you through the process of buying an investment trust, from understanding what it is to executing your first trade.
Understanding Investment Trusts
What is an Investment Trust?
An investment trust is a type of collective investment fund found mostly in the UK. Unlike mutual funds, which issue new shares whenever someone wants to invest, investment trusts issue a fixed number of shares when they are launched. These shares are then traded on the stock exchange, just like the shares of any other public company.
How Do Investment Trusts Work?
Investment trusts pool money from investors to buy a diversified portfolio of assets. The value of the trust’s shares is determined by the performance of its underlying assets. If the assets perform well, the value of the trust’s shares typically increases, and vice versa.
Advantages of Investment Trusts
Professional Management: Investment trusts are managed by experienced fund managers who make investment decisions on behalf of the shareholders.
Diversification: By investing in a variety of assets, investment trusts help spread risk.
Potential for Higher Returns: Due to their ability to leverage and invest in a wide range of assets, investment trusts can potentially offer higher returns compared to other types of investments.
Liquidity: Shares in investment trusts can be bought and sold on the stock exchange, providing liquidity to investors.
See Also: How Did Investment Trusts Develop?
Step-by-Step Guide to Buying an Investment Trust
Step 1: Research and Understand Your Investment Goals
Before you start investing, it’s essential to understand your investment goals. Are you looking for capital growth, income, or a combination of both? Knowing your goals will help you choose the right investment trust.
Step 2: Choose the Right Investment Trust
There are many investment trusts available, each with different objectives and strategies. To choose the right one, consider the following factors:
Investment Objective: Look at the trust’s investment objective and strategy. Does it align with your goals?
Performance: Check the historical performance of the trust. While past performance is not a guarantee of future results, it can give you an idea of how well the trust has been managed.
Fees and Charges: Investment trusts charge fees for management and administration. Make sure you understand these fees and how they will impact your returns.
Risk Level: Assess the risk level of the trust’s investments. Make sure you are comfortable with the level of risk you are taking on.
Step 3: Open an Investment Account
To buy shares in an investment trust, you need to have an investment account. There are different types of accounts you can use, including:
Brokerage Account: A standard investment account that allows you to buy and sell a wide range of securities.
Individual Savings Account (ISA): A tax-efficient way to invest in the UK. Any gains made within an ISA are free from capital gains tax and income tax.
Self-Invested Personal Pension (SIPP): A pension plan that gives you control over your investment choices. Contributions to a SIPP are eligible for tax relief.
Step 4: Fund Your Investment Account
Once you have opened your investment account, you need to fund it. You can do this by transferring money from your bank account. Some platforms also allow you to transfer existing investments into your new account.
Step 5: Place Your Order
With your investment account funded, you are ready to buy shares in your chosen investment trust. Here’s how to place your order:
Search for the Investment Trust: Use the platform’s search function to find the investment trust you want to buy. You can search by the trust’s name or its ticker symbol.
Select the Number of Shares: Decide how many shares you want to buy. Keep in mind that the price of shares can fluctuate, so the total cost may vary.
Choose the Type of Order: There are different types of orders you can place, including:
Market Order: Buys shares at the current market price.
Limit Order: Buys shares only if the price falls to a specified level.
Review and Confirm: Double-check your order details and confirm the purchase.
Monitoring and Managing Your Investment
Track the Performance
After purchasing shares in an investment trust, it’s important to monitor its performance. Most investment platforms provide tools and resources to help you track your investments. Pay attention to:
Net Asset Value (NAV): The value of the trust’s assets minus its liabilities, divided by the number of shares outstanding.
Share Price: The current market price of the trust’s shares.
Dividend Payments: If the trust pays dividends, track the payments and reinvest them if desired.
Review Your Investment Strategy
Periodically review your investment strategy to ensure it still aligns with your financial goals. Consider any changes in your financial situation, market conditions, or the performance of the investment trust.
Risks and Considerations
Market Risk
Like all investments, investment trusts are subject to market risk. The value of the trust’s shares can fluctuate based on market conditions and the performance of its underlying assets.
Leverage Risk
Some investment trusts use leverage to enhance returns. While this can increase potential gains, it also amplifies potential losses.
Liquidity Risk
Although investment trusts are traded on the stock exchange, there can be times when it is difficult to buy or sell shares without affecting the share price.
Management Risk
The performance of an investment trust depends largely on the skills of its fund managers. Poor management decisions can negatively impact the trust’s performance.
Tips for Successful Investing in Investment Trusts
Diversify Your Portfolio
Don’t put all your eggs in one basket. Diversify your investments across different asset classes and sectors to spread risk.
Stay Informed
Keep up-to-date with market news and the performance of your investments. This will help you make informed decisions and respond to changes in market conditions.
Be Patient
Investing in investment trusts is typically a long-term strategy. Be patient and avoid making impulsive decisions based on short-term market movements.
Conclusion
Buying an investment trust can be a rewarding way to achieve your financial goals. By following the steps outlined in this guide, you can make informed decisions and invest with confidence. Remember to conduct thorough research, understand the risks involved, and periodically review your investment strategy. With the right approach, investment trusts can be a valuable addition to your investment portfolio.
