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How do investment trusts work?

An investment trust is a public limited company with shares quoted on the stock market. Investment trusts primarily invest in the shares of other companies, but some also have bonds or other assets like commercial property.

When you invest in an investment trust, you effectively become a shareholder in that company. The trust pools your money along with the money of other shareholders and employs professional fund managers to invest it in a wide range of different companies.

• Smaller investments welcome  – Because your money is invested alongside other investors, you’ll have access to a diversified and professionally-run portfolio of shares, even if you can only invest a small amount.
• Low-effort – You’ll have all the potential rewards of an actively managed portfolio, without having to manage it yourself.
• Spread your risk – Your risk will be spread across a greater number of investments, so you won’t be reliant on the success of one or even a handful of companies.
• Invest in property, bonds and cash – As well as investing in companies both in the UK and abroad, investment trusts can invest in property, bonds and cash.
• Ability to borrow for better potential returns – The trust’s manager can borrow money to increase your market exposure. This is called ‘gearing’ and can help boost returns in rising markets. If a trust borrows the equivalent of 10% of its assets then it will be 10% geared.
• Independent board – Like any listed company, investment trusts are overseen by an independent board that acts on your behalf. They closely monitor investment performance and can change the fund manager if they’re not happy with the performance of the trust.
• Professional expertise – The trust will be run by professional fund managers who spend their time researching individual companies and markets, looking for good investment opportunities.
• Global potential – Investment trusts have access to opportunities at home and abroad, giving you better potential for returns.
• Value for money – Many other collective (or pooled) investments involve higher initial charges. This normally applies to all investments, even if you are paying in monthly. Ongoing charges on investment trusts tend to be lower which helps make them a relatively cost effective way of accessing the stock market. 
• Regular and consistent income – In contrast to open-ended funds, investment trusts are able to hold onto some of the income they generate in the good years so they can bolster dividend payments in the bad. This gives you a more reliable income.
• Tax advantages – When an investment trust sells shares it is not taxed on the capital gains it’s made, unlike direct investment made by private investors.
• Performance potential – In the past, investment trusts have delivered better performance that the average Open Ended Investment Company (OEIC) over longer terms.