You may have heard of investment trusts before. If not, don’t worry. I’m going to explain all you need to know about these interesting investments.

They can be a great way to build wealth. But it they also mean letting someone else manage your investments. So it’s important that you know how they work and how to separate the good from the bad and the ugly.

Let’s dive in.

What is an investment trust?

An investment trust is a unique type of investment. They are publicly listed companies that investors can buy shares in. The trusts use the funds to invest in other companies or assets.

Some investment trusts are massive in terms of how much money they control.

You will see that the value of some of these investment companies are up there with the biggest businesses in the world.

How does an investment trust work?

Your money is pooled together with other investors. Then with just that one single investment, you can get access to lots of different companies or assets.

They have a fixed number of shares that can be bought and sold on the stock market.

The value of the assets held by an investment trust is called the NAV (net asset value). Sometimes you might see that trusts are trading at a discount or a premium.

This just means that you can buy or sell the shares for more or less than their intrinsic value (how much what they own is worth).

Investment trusts can also use something called ‘gearing’. Which means they can borrow money to invest. This can amplify returns but it can also maximise losses. So it’s really important that you pick a trust with managers that know what they are doing.

Past performance doesn’t dictate future results, but you can check the history of an investment trust to see how it has done previously. This will just give you an idea about returns and if the growth is stable or volatile and all over the place.

What is the difference between a fund and an investment trust?

Investment trusts are ‘close-ended’ investments. This just means that new money cannot come in or out of the fund.

The real benefit of this is that the majority of funds can remain invested. If someone wants to get out of an investment trust, they just sell their shares. So no selling of investments in order to pay investors who want to withdraw.

With regular funds, there needs to be liquidity so that investors can actually pull money out of the fund if they want too. But with an investment trust, there is no tinkering with the underlying money in the fund.

This gives them great stability and the ability for funds and managers to have a long-term investing strategy. So there is no pressure to force sell investments if lots of investors want their money out.

Are investment trusts a good investment?

They can be a fantastic investment. They can also be a pathetic investment.

A large part of how well they perform will be down to the fund managers (the people running the fund).

Most investment trusts also have different goals, so you want to make sure you pick one that focuses on investments that are important to you.

These days there are investments trusts for just about everything. From growth and value investing to positive environment and nutrition focused funds.

How can I invest in one?

If you have an investment account with a decent amount of choice, you should be able to find investment trusts on your platform.

It’s important to research any investment before putting your money in. You should also check that the strategy of that trust aligns with your own strategies and goals.

Investment trusts do have quite low fees compared to some other types of managed investments but it’s still worth using a stocks and shares ISA if you can in order to reduce the tax you pay on investments.

One option for staying diversified is to pick a few different trusts that focus on different areas. This way you can get yourself a really varied portfolio which can spread your risk.