What are investment trusts?
Introducing an investment fund with a unique collection of features.

What are investment trusts?
A guide to getting started
Investment trusts exist solely to invest. They allow you to make a single investment which gives you a share in a much larger portfolio.
Investment trusts are a type of collective investment which allows you to spread your risk and access investment opportunities that you wouldn’t be able to invest in on your own.

Investment trusts
Investment trusts are a type of fund. They have a number of unique features which we will explore in this section.
Investment trusts have strong long-term performance.
Listed on a stock exchange
One of the unique features of investment trusts is that they are public limited companies (plcs). Their shares are listed on a stock exchange just like those of any other public company and you invest in investment trusts by buying and selling their shares.
Investment trusts can be listed on one of several stock exchanges but if you’re a UK investor, you’ll find most of them on the London Stock Exchange.
Closed-ended structure
Investment trusts are known as closed-ended, as opposed to unit trusts which are open-ended. What’s meant by investment trusts being closed-ended is that they have a fixed number of shares in issue at any one time. You invest in an investment trust by buying the shares from another investor on the stock market. Similarly, when you want to sell your shares, you sell them on the stock market.
In contrast, open-ended funds expand or contract depending on demand as investors move their money in and out of the fund. This means open-ended funds have to be ready to give investors their money back at any time. So they normally invest only in assets which can be sold very quickly.
Because investment trusts are closed-ended, they don’t have to deal with these inflows and outflows of money. This allows them to invest in assets which can be hard to buy and sell quickly, such as infrastructure, private companies or property, which have the potential to deliver better long-term returns or higher levels of income. It also enables investment trust managers to make long-term investment decisions as they don’t have to buy and sell investments based on investors moving money into or out of the fund.
Discounts and premiums
An investment trusts effectively has two values. One is the value of the underlying assets in its portfolio, known as its net asset value (NAV). The NAV of a trust is the value of all the investment trust’s assets, less liabilities such as any debt.
The other is its market capitalisation, which is the combined value of its shares in circulation.
Because the share price is impacted by supply and demand, the value of the shares can sometimes deviate from the value of the underlying assets. When demand is strong, the shares can be worth more than the NAV. When this happens, a trust is said to be trading at a premium.
When demand weakens, the value of the shares can fall to below the NAV. The trust is then said to be trading at a discount.
- Buying shares at a discount means you pay less than the NAV.
- Buying at a premium means you pay more than the NAV.
NAV | 100p | 100p | 100p | 100p |
---|---|---|---|---|
Share price | 100p | 90p | 80p | 110p |
Discount / Premium | 10% Discount | 20% Discount | 10% Premium | |
Shown as | -10% | -20% | 10% |
More often than not, investment trust shares tend to trade at a discount.
When an investment trust trades at a discount, it can be a good opportunity to buy. However, you shouldn’t assume that buying at a discount is automatically a good thing. The price of investment trust shares depends on a whole range of things, including the sentiment towards the investment trust , its investment strategy and the type of investments it holds. There may be a good reason why it is trading at a discount.
When the discount changes
If you invest in an investment trust it should be for the long term, so changes in the discount shouldn’t make too much difference – but it’s worth understanding nevertheless.
- If you buy at a discount and the share price rises more than the NAV, narrowing the discount, you’ll get a better return than the NAV.
- If the discount widens, for example by the NAV rising faster than the share price, you won’t get as good a return as the NAV but you won’t necessarily make a loss.
- If the discount widens because the share price and the NAV are both falling, but the share price is falling faster, you will lose more than the fall in the NAV.
Boards of directors
Because investment trusts are public limited companies (plcs), they have independent boards of directors, just like any other plc. The directors’ duty is to look after your interests as an investor, by ensuring the trust is as successful as possible.
The directors meet several times a year and monitor the trust's performance. They answer to the shareholders, which means you have some say in how the trust is run.
Shareholder democracy
When you buy a share in an investment trust you become a shareholder. Shareholders in investment trusts have the same rights as other shareholders in other companies.
Shareholders can:
- Vote on issues at the trust's annual general meeting (AGM).
- Table motions to be discussed.
- Call for extraordinary general meetings (EGMs).
- Vote in new directors if they are not happy with the current ones.
In other collective investments, you don’t have as much of a say in how the fund is run.
Gearing
Investment trusts can borrow money to make additional investments. This is called ‘gearing’. It lets the trust take advantage of a long-term plan or a particularly attractive stock without having to sell existing investments.
The idea is that the additional investment makes enough money to pay off the loan (including interest) and make a profit on top of that. If it works, the more the trust borrows, the more profit it makes. If the investment fails, the more the trust borrows, the more it loses. So, as a rule, the more an investment trust borrows the more risky it is.
Investment trusts can usually borrow at lower rates of interest than you’d get as an individual. They also have flexible ways to borrow – for example they might get an ordinary bank loan, or issue special kinds of shares that work like IOUs.
Not all investment trusts use gearing. Many of those that do use gearing only use modest levels. It’s a decision taken by the fund manager and the board of directors. The gearing policy of the trust may change from time to time. It’s regularly reviewed by the board and manager.
While all gearing adds risk, being able to gear is an advantage investment trusts have over other kinds of fund, such as unit trusts, which are not permitted to do it.
Management
Each trust has a fund manager who makes the day to day decisions about what stocks and other investments to buy and sell.
Most investment trusts are managed by an external management group, which may manage several investment trusts. The board of directors select the fund manager (or managers).
Income
Many investors want to generate income from their investments.
Investment trusts have a number of advantages when it comes to delivering high levels of income, or income that grows over time.
To find out more, read our guide ‘Looking for a little bit more’.
If you know which income-paying investment trusts you are interested in, visit Income Finder, our set of tools and resources for income-seeking investors. Income Finder allows you to create a virtual portfolio of income-paying investment trusts, track the dividend dates and see how much income you could receive over a year.
Specialisation in particular sectors
Investment trusts can invest in a much wider range of investments than other types of fund. In fact, they can invest in almost anything. The investment trust will set out its particular approach in its investment policy.
Investment trusts can invest in:
- Mainstream global companies.
- Companies from specific parts of the world.
- A particular type of company, like smaller companies.
- Particular business sectors, like technology or commodities.
- Different kinds of assets, such as property or infrastructure.
Whatever your investment style or goal, investment trusts can offer a solution to match.
Whatever your investment style or goal, investment trusts can offer a solution to match.

Different types of investment trusts
An investment trust is a company listed on a stock exchange which invests in shares and other assets, There are a few different types of investment trusts to be aware of:
- UK investment trusts.
- Non-UK investment companies.
- Real estate investment trusts (REITs).
- Venture capital trusts (VCTs).
In this guide, the umbrella term “investment trust” is used to refer to all of the above. More strictly, only UK investment trusts should use the term, but few people observe this distinction.
Real estate investment trusts (REITs)
Many investment trusts that invest in property are structured as REITs. These have similar, but different rules to UK investment trusts. They are trusts that:
- Own commercial or residential property and rent it out.
- Have to distribute 90% of the profits they make from their rental business to the REIT’s shareholders.
- Do not have to pay corporation tax on profits from the rental business.
Shareholders in REITs pay income tax, as opposed to dividend tax, on the distributions that are made to them in this way. The general idea is that they are taxed as though they owned the properties themselves. Of course, if REIT shares are held in an account such as an ISA or a SIPP, no tax is paid on the distributions, making REITs a tax-efficient way to invest in property.
Venture capital trusts (VCTs)
VCTs invest in some of the most dynamic small businesses in the UK to help them grow. Because of the economic growth these businesses can generate, the government offers generous tax benefits when you invest in VCTs. To find out more about VCTs, read the visit the VCT section of this guide.
Different types of shares and securities
There are different types of investment trust shares which investors can buy. Most are ‘ordinary’ shares but there a couple of other options. However, different types of shares are specialist investments and investors who are just starting out should make sure they are comfortable with ordinary shares first.
This type of financial instrument has a limited life and can be converted into new ordinary shares in the trust at some time in the future at a fixed price known as the strike price.
Warrants have similar characteristics to subscription shares. They don’t have the same rights as ordinary shares (e.g. they are not entitled to any dividends before they are converted into the ordinary shares). They are also much higher risk than ordinary shares, because if the share price of the ordinary shares is lower than the warrants’ strike price, the warrants will have limited value. So it’s possible for warrants to expire worthless and you could lose all the money you paid for them.
Convertibles are shares or securities which can be converted into ordinary shares at some time in the future.
Why choose investment trusts?
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 you might get back less than you invested.
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 trusts have important benefits and risks over open-ended funds which are important to know.
Benefits of investment trusts compared to other types of fund
- 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 trust. In an open-ended fund, managers have to sell assets to meet redemptions, or may have to keep a certain amount of money in cash which can hamper their performance.
- 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 provide an additional layer of oversight, protecting your interests.
- Gearing – the ability of investment trusts to borrow money to invest means that they may perform better over the long term (but see risks below).
- Ability to invest in hard-to-sell assets – like private equity, infrastructure and renewable energy.
- Consistent income – investment trusts can smooth the income they pay out from year to year by reserving income in good years to pay out later. Watch the video below to find out more.
Risks of investment trusts compared to other types of fund
- Gearing – if an investment trust uses gearing, this will make your returns worse in periods when markets go down.
- Discounts – if an investment trust 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 trusts be suitable for?
First of all, investment trusts 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 trusts the right investments for you?
You need to think about this carefully, and if in doubt, consult a financial adviser. The following is only a general guide and can’t take into account your individual circumstances.
Investment trusts 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 property.
- The ability to buy and sell shares at any time during the trading day.
On the other hand, investment trusts will not be suitable for you if you:
- Have an investment time horizon of less than five 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.
