Is an investment trust right for you?

You need to answer yes to the following questions before you begin thinking about investing in an investment trust:

  1. Are you willing to risk your investment dropping in value?

  2. Are you looking to invest for a substantial amount of time i.e. at least 5 years?

It is also recommended that you have suitable savings in cash before investing for the long term.

If you are looking for a short term investment or are unhappy with putting your money at risk then an investment trust is not for you.

How to pick the right investment trust

Here are four things you should do before choosing an investment trust:

Look at where they invest

Each investment trust will invest in a different asset class and location.

For example: 'Investment trust 1' may only invest in the Asian emerging markets, while 'Investment trust 2' may only specialise in the European property market.

Look at past performance


Previous years' performance figures are not a guarantee of future success

There is some debate over how useful performance figures are in assessing how suitable a fund is before you invest - strong performance figures don't mean that a fund will continue to make a profit.

However, a consistent record of above average returns could be an indication that a fund is well managed.


What are absolute returns?


Absolute returns show you how much an investment has grown over a set period; for example, if you invested 1,000 and after two years it was worth 1,200, the absolute return would be 20%.

The danger with using absolute returns is that they fail to show whether an investment trust has fallen in value in any one year, for example:

1,000 could double in value to 2,000 in year one but then fall by 50% in year two to 1,500 and appear like it has had an absolute return of 50% over the two years.


What are annualised returns?


They are the standard way to show how an investment trust has performed over a number of years.

The annualised return, gives you an average of how much it has gained per year, taking into account that the balance would increase each year by the amount of interest it had earned.

In same case above, the annualised return is 9.54%, meaning that if you had put your 1,000 in a savings account paying 9.54% with compound interest; it would be worth 1,200 after two years.

Check out the fund manager

The fund manager determines where your money is invested, so this is someone you need to have faith in.

Check each fund manager's performance over three to ten years online on the TrustNet website.

Top tip: Check how long the fund manager has been his current role - if he or she only joined a few months ago performance figures will be less useful in assessing how competent the fund manager is.

Their attitude to risk

Some investment trusts use 'gearing' to borrow money for leverage and to chase bigger returns. This can increase their profits when things go well but also makes them riskier because when things go wrong the losses are increased too.

You can find out more about gearing in our 'What is an investment trust?' guide.

What do you need to buy shares in an investment trust?

You will need a broker account or a financial advisor to buy shares in your chosen investment trust, though each has pros and cons:

Broker account

  • Costs less

  • Immediate online access

  • Unbiased information only

  • No advice, execution only

  • Only available online

  • Extra hidden fees

Financial advisor

  • Expert advice before you invest

  • Regulated face to face guidance

  • Can be much more expensive

  • Can be slower than online brokers

What is an investment limit?

Some investment trusts put limits on how much you can invest, either by stipulating a minimum or maximum investment deposit.

How can you monitor the performance of your investment trust?

Performance figures for most investment trusts are published on a daily basis. Some will report live trading figures online so you can track how they perform in real time.

One of the key figures is the NAV (Net Asset Value); this is the value of all of an investments trust's assets per share.

The easiest place to track your investments is likely to be online through:

  • your broker account e.g. Hargreaves Lansdown

  • your investment trust's website

  • third party investment tracking websites

How do I sell my shares in an investment trust?

You can sell your shares through the same broker account that you purchased them with, or if you purchased them through an advisor by instructing them to sell them for you.

If you manage your investment trust shares online you can log into your account and select which investment to sell.

Some accounts may charge an exit fee, but many online accounts will let you sell free of charge.