Investment Trust

Updated on April 9, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Investment Trust Fund?

An investment trust is a financial entity that receives funds from investors or shareholders and invests in different portfolios on their behalf. It makes a limited number of shares available for trade, given the market’s demand and supply of investment securities.

Investment Trust

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Trust (wallstreetmojo.com)

Investing in these trusts helps investors deal in less risky trades by providing them an opportunity to enjoy a diversified portfolio. In addition, investment in diverse profiles enables them to gain from one, even if there is a loss from another. In short, individuals and entities can maintain a balanced investor profile.

Key Takeaways

  • An investment trust, a closed-end fund, is a publicly listed financial institution that invests in shares or financial assets on behalf of its investors or other organizations. 
  • The value of the amount of money invested in it depends on the demand and supply of the invested share or financial asset and the underlying value of the owned assets.
  • It is the best option for an investor looking at profits with minimal risk since it allows investing in many shares rather than putting all of the investment into one company’s shares.
  • Although the risk of losing out on investment due to the performance of one share would not hurt the investor, they will be in a better position if they invest in other shares in the fund, which might have a better performance.

Investment Trust Explained

An investment trust is a closed-ended financial institution that pools the funds from shareholders and invests in diversified portfolios on their behalf. It differs from a unit investment or mutual fund, which offers diversified holdings in the form of units and not as shares. The demand and supply of the investment trust shares determine the outstanding shares to trade then.

The trust functions based on the market. Thus, the investment trust fund performs well if the market performs well. Therefore, the fund manager needs to be able to gauge market conditions and enter or exit a favorable or unfavorable position. As a result, it has an inherent risk of losing out on the investment if the right decisions are not made at the right time.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Factors

In theory, the returns from investing in a trust are humongous. However, the returns rely on the performance of the invested shares and assets and their market demand and supply.

Since they hold a fixed amount of shares and assets, the supply and demand of the invested shares and assets in the trust affect the value of the underlying assets.

Investment Trust Factors

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Trust (wallstreetmojo.com)

The performance of the assets and shares in the investment trust majorly impacts the value of the money invested. However, since investors spend money on various assets and shares, the trust’s value remains stable in a short span.

Recommendations

The positive sides of these closed-ended funds are too clear for the investors to notice the associated challenges. However, they must understand and prepare to handle the same while collaborating with different types of these trading, be it unit investment trust or citizen investment trust.

To gain considerable returns from an investment, investors must lock out a substantial amount of time for which they invest the money. This tenure can extend up to a minimum of five years or more. Furthermore, they depend on the market and on the fund manager’s decisions, which might result in a loss of investment. Hence, the investor is left with no option other than to exit from the investment completely.

The profit and dividends gained from it are taxable. Therefore, they can reduce the actual returns gained from the investment.

Examples

Let us consider the following examples to understand how an investment trust works:

Example #1

Suppose one invests $1,000 in XYZ Trust. It pools the money from shareholders and other investments to purchase a diverse range of products, including shares, bonds financial assets.

This fund becomes the financial source for the fund manager to buy shares. Since investors invest in the open market, they buy and sell shares and assets per the market conditions. This ensures they seize the right opportunity to earn maximum profits from the invested shares and assets.

Investors, however, can sell the shares in the open market at the market price and generate profit from the investment. Therefore, the investment can increase or decrease depending on the invested shares and financial assets.

Example #2

Real estate investment trusts (REITs) are among the most fruitful investments, especially for starters. This is because significant portfolios do not lose value overnight. Hence, investors can consider being in a safe zone by investing in these trusts. For example, Claros Mortgage Trust has been declared one of the most beneficial trusts to invest in, in 2022. It offers commercial real estate loans to the most important cities in the United States. Hence, it becomes a safer investment option.

Investment Trust vs Unit Trust

For investors, unit trusts are one of the most common investment options. However, the trusts fit best into some purpose-driven financial planning due to their unique features. The two differ in multiple ways:

CategoryInvestment TrustUnit Trust
Fund typeClosed-end fund with a set amount of funds to be raised.Open-ended funds with no limit of cash to accept.
Fund sizeListed on the stock market for traders to buy sharesFund size diminishes when the number of sellers exceeds the number of buyers
Best fitFor long-termFor short-term

Frequently Asked Questions (FAQs)

What is a collective investment trust?

It is a trust that takes care of the pooled trust accounts under the supervision of a bank or trust company. They use the grouped assets of specific criteria received from different entities and individuals to build diversified portfolios.

Are investment trusts closed-ended?

Yes, these trusts are closed-ended funds as they have a set limit of cash to be accepted by the investors. Therefore, they do not look for more money after a certain limit.

Why do investment trusts trade at a discount?

Unlike open-ended funds that are ready to accept as much cash from investors as possible, the investment trusts trade at a discounted value lower than their investment. However, sometimes, they may trade at a value more than the value of the investments, termed as premiums. While the former makes the share cheaper, the latter makes it expensive.

This has been a guide to What is an Investment Trust. Here, we explain the factors affecting it along with examples and a comparison with unit trust. You can learn more about auditing from the following articles-