Investment Trusts

An investment trust is a financial organisation that pools funds from investors to buy and manage a diverse portfolio of securities. Unlike mutual funds, which issue redeemable units, investment trusts are closed-end funds that issue a fixed number of shares. These shares are traded on stock exchanges, allowing investors to buy and sell them just like regular stocks. This structure enables investment trusts to take a long-term view and invest in less liquid assets, potentially offering higher returns over time.

In this article, we will talk about the key aspects of investment trusts, what investment trusts and investment trusts meaning.

What is an investment trust?

An investment trust is a type of collective investment fund. It pools investors' money to purchase a diversified portfolio of stocks, bonds, or other securities. Managed by a professional investment manager, investment trusts aim to generate returns for their shareholders. These trusts are closed-ended, meaning they have a fixed number of shares that are traded on the stock exchange. This structure allows the fund manager more flexibility to invest in a wide range of assets without worrying about constant inflows and outflows of money.

Understanding the meaning of investment trust with an example

Investment trusts can be better understood through an example. Suppose an investment trust, "XYZ Trust," pools money from various investors. XYZ Trust collects Rs. 100 crore from its shareholders and invests this amount in a mix of Indian equities, government bonds, and real estate. The professional fund manager of XYZ Trust makes decisions on which assets to buy or sell based on market conditions and investment objectives. Over time, if the value of the assets increases, the value of the trust's shares also rises, providing potential capital gains to the investors.

What do investment trusts invest?

Investment trusts invest in a wide array of assets, offering diversification to reduce risk. These investments typically include:

• Equities: Shares of companies listed on stock exchanges.

• Bonds: Government and corporate bonds providing fixed income.

• Real estate: Properties and real estate investment trusts (REITs).

• Commodities: Physical assets like gold, oil, and other raw materials.

• Private equity: Investments in private companies not listed on stock exchanges.

By diversifying across these asset classes, investment trusts aim to balance risk and return, providing investors with a stable and potentially profitable investment vehicle.

How do investment trusts work?

Investment trusts operate as publicly listed companies that pool money from investors to buy a diversified portfolio of assets. Here’s a step-by-step breakdown of how they work:

• Formation: An investment trust is established and listed on a stock exchange. It raises capital by issuing a fixed number of shares to investors.

• Fund management: A professional fund manager is appointed to make investment decisions. The manager has the freedom to choose a variety of assets, such as equities, bonds, real estate, and more, according to the trust's investment objectives.

• Trading: Shares of the investment trust are traded on the stock exchange, just like any other publicly listed company. Investors can buy and sell shares at market prices.

• Income generation: The assets held by the trust generate income through dividends, interest, and capital gains. This income is either reinvested to grow the trust's asset base or distributed to shareholders as dividends.

• Performance monitoring: The fund manager continuously monitors and adjusts the portfolio to optimise performance, aiming to achieve the best possible returns for the shareholders.

• Reporting: Investment trusts provide regular updates on their performance, asset allocation, and financial health to keep shareholders informed.

This structure allows investment trusts to offer a stable and diversified investment option, potentially providing better returns than individual stock or bond investments.

What do investment trusts invest in?

Investment trusts diversify their investments across several asset classes, including:

• Equities: Shares of companies listed on stock exchanges.

• Bonds: Government and corporate bonds providing fixed income.

• Real estate: Properties and REITs.

• Commodities: Physical assets like gold and oil.

• Private equity: Investments in private companies.

This diversified approach helps spread risk and aim for balanced, long-term returns for investors.

10 reasons to choose investment trusts

Investment trusts offer several advantages that make them an attractive option for investors. These include diversification, professional management, and the potential for steady returns. Here are ten compelling reasons to consider investment trusts as part of your investment strategy:

1. Investors are shareholders

By investing in an investment trust, you become a shareholder in the trust, gaining a stake in its portfolio of assets. This means you can benefit directly from the trust’s performance and growth.

2. Small minimum investments

Investment trusts often have lower minimum investment requirements compared to other investment vehicles. This makes them accessible to a broader range of investors looking to start with a smaller capital outlay.

3. Purchasing power

Investment trusts pool capital from multiple investors, providing significant purchasing power. This allows them to acquire a diversified range of assets, enhancing potential returns and spreading risk.

4. Risk management

Investment trusts invest in a wide array of asset classes, which helps in managing risk. By diversifying holdings, they can mitigate the impact of poor performance in any single asset or sector.

5. Easy to track

Investment trusts are listed on stock exchanges, making it easy for investors to track their performance. Regular updates and financial reports are readily available, providing transparency and aiding informed decision-making.

6. Investor protection

Investment trusts operate under a regulated framework, offering investor protection. They are subject to strict regulations, ensuring that they adhere to governance and transparency standards.

7. Invest in the best

Investment trusts are managed by experienced professionals who make informed investment decisions. This expertise allows investors to gain exposure to high-quality investments that may be difficult to access independently.

8. Easy to buy and sell

Shares of investment trusts are traded on stock exchanges, offering liquidity. Investors can buy and sell shares easily, providing flexibility and convenience in managing their investments.

9. Gearing advantage

Investment trusts can use gearing (borrowed funds) to potentially enhance returns. This leverage allows them to invest in a larger portfolio, amplifying both potential gains and risks.

10. Smoothing dividends

Investment trusts often aim to provide consistent dividends by smoothing income over time. This approach helps in delivering steady cash flow to investors, even if the underlying asset performance varies.

Benefits of investing with investment trust

Investing in investment trusts provides several key benefits, including professional management, diversified portfolios, and the potential for steady returns. These features can help investors achieve their financial goals by accessing well-managed, broad-ranging investment opportunities.

1. Diversified portfolio

Investment trusts offer a diversified portfolio that spreads investments across various asset classes, sectors, and geographies. This diversification helps in mitigating risks associated with individual investments and enhances the stability of returns.

2. Access to a wider range of investments

Investment trusts provide access to a wide range of investments, including equities, bonds, real estate, and private equity. This broad exposure allows investors to benefit from different market segments and asset types.

3. Consistent income stream

Many investment trusts aim to deliver a consistent income stream through regular dividend payments. This approach can be particularly beneficial for investors seeking reliable cash flow from their investments.

4. Actively managed

Investment trusts are managed by experienced professionals who actively make investment decisions. This active management helps in optimising returns and adjusting the portfolio based on market conditions.

How much do investment trusts cost?

Investment trusts come with various costs that investors should consider. These include management fees, annual charges, and other associated expenses that can impact overall returns.

1. Management fees

Investment trusts charge management fees for professional oversight and fund management. These fees are typically expressed as a percentage of the assets under management and can vary based on the complexity and scale of the investment trust.

2. Annual charges

Annual charges cover the operational costs of running the investment trust. These charges, also known as ongoing charges, include administrative, compliance, and other operational expenses.

3. Performance fee

Some investment trusts charge a performance fee, which is an additional fee based on the fund’s performance relative to a benchmark. This fee aligns the manager’s incentives with investor returns.

4. Flat rates

Some investment trusts may charge flat-rate fees instead of percentage-based fees. These fixed costs provide predictability in terms of expenses but may not scale with the size of the investment.

How do investment trusts compare with unit trusts?

Feature	Investment trusts	Unit trusts
Structure	Closed-ended; fixed number of shares	Open-ended; units bought and sold as needed
Trading	Traded on stock exchanges	Not traded; bought/sold at daily price
Pricing	Market price can differ from NAV	Priced at NAV
Gearing	Can use leverage to boost returns	Typically no gearing
Management style	Actively managed with fixed capital	Actively managed with variable capital

Should you invest with investment trusts?

Investment trusts can be a worthwhile investment option if you seek diversified exposure and professional management. They offer benefits like access to a broad range of investments and potentially steady income streams. However, evaluating your financial goals and risk tolerance is crucial before investing.

Factors to consider before investing with investment trusts

Before investing in an investment trust, consider factors such as the trust’s management fees, investment strategy, historical performance, and the underlying assets. Understanding these aspects will help ensure that the trust aligns with your investment objectives and risk profile.

Conclusion

Investment trusts offer a range of advantages for investors seeking professional management and diversified portfolios. With the Bajaj Finserv Mutual Fund Platform, you can explore over 1000 mutual fund schemes along with comparing them and benefit from a well-managed investment experience. This platform provides access to a broad spectrum of investment options, helping you make informed choices to meet your financial goals.

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