Every investment offers benefits and risks. The benefits include the opportunity to grow the value of your money, to generate an income or to diversify your savings. The risks are that you could lose your money or that it might be worth less when you need it.
You should not invest if you cannot afford to lose your money, if you need a guaranteed income or if you’re not prepared to see the value of your investments fall. If you are unsure, it’s important to get independent financial advice.
If you feel that investing with funds could be for you, investment companies have important benefits and risks over open-ended funds which are important to know.
Benefits of investment companies
- Closed-ended structure – this allows the manager to make longer-term decisions, without having to worry about needing to sell assets when investors sell their shares in the investment company.
- Listed on a stock exchange – this offers you the ability to buy and sell shares at any time in normal trading hours.
- Boards of directors – they an additional layer of oversight, protecting your interests.
- Gearing – the ability of investment companies to borrow money to invest means that they may perform better over the long term (but see the risks below).
- Ability to invest in hard-to-sell assets like private equity and infrastructure.
Risks of investment companies
- Gearing – this is likely to make your returns worse in periods when markets go down.
- Discounts – if an investment company discount widens when markets go down, you are likely to suffer a bigger loss than if you had invested in a similar open-ended fund.
Who might investment companies be suitable for?
First of all, investment companies won’t be suitable for you if you can’t accept the usual risks that come with investing, such as losing money, or seeing income from your investments fall.
If you can accept the risks that come with investing, the question still remains: are investment companies the right investments for you?
You need to consider this question carefully, and if in doubt, consult a financial adviser. The following is a general guide only and can’t take into account your individual circumstances.
Investment companies could be suitable for you if you want:
- Strong growth in your investments over the long term.
- An income which rises consistently over time, or a higher level of income.
- An independent board protecting your interests.
- Access to alternative assets like infrastructure or specialist property.
- The ability to buy and sell shares at any time during the trading day.
On the other hand, investment companies will not be suitable for you if you:
- Have an investment time horizon of less than 5 years.
- Need a guaranteed return.
- Need a guaranteed income.
- Can’t accept the risks that come with gearing and discounts.
- Want an investment where the price always matches the value of the underlying assets.