Investment Trust

What is an Investment Trust Fund?

An investment trust is a publicly listed financial institution, which is a closed-end fundClosed-end FundA closed-end fund refers to a professionally managed fund whereby an investment company issues the initial public offering to raise capital. Later, these stocks are exchanged in the open market among the shareholders like other shares. Such investments provide better returns than the open-end funds.read more (CEF) that invests in shares or financial assets on behalf of its investors or other organizations. The value of the amount of money invested in an investment trust is dependent on the demand and supply for the invested share or financial asset and the underlying value of the assets that are owned.

For an investor who is looking at profits with minimal risk, It is the best option since it allows investing in a plethora of shares rather than putting all of the investment into one company’s share. Although the risk of losing out on investment due to the performance of one share would not hurt the investor, he/she will be in a better position, having invested in other shares in the fund, which might have a better performance.

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)

Factors Impacting Investment Trust Fund

Investment trust functions on the basis of the market. If the market performs well, so will the investment trust’s fund. The investment trust fund manager needs to be able to gauge market conditions and enter or exit a position that is favorable or unfavorable. As a result, It has an inherent riskInherent RiskInherent Risk is the probability of a defect in the financial statement due to error, omission or misstatement identified during a financial audit. Such a risk arises because of certain factors which are beyond the internal control of the organization.read more of losing out on the investment if the right decisions are not made at the right time. Below are the two main factors that decide the value of the investment trust.

Factors Impacting Investment Trust Fund

Example of Investment Trust

Let’s discuss an example.

Let’s assume that you invest $1,000 in XYZ investment trust today. The money that is received by the investment trust is pooled along with the investment of other investors to purchase a diverse range of products, including shares, bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually.read more, and other financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more.

To simplify,

  • You invest $1,000 in an investment trust.
  • XYZ investment trust pools the $1,000 you invested with money invested by other shareholders into a single pot, which is the ”Fund”.
  • This ”Fund” is ultimately used to buy shares and other financial assets by the ”Fund Manager”.
  • Since the money is invested in the open market, the shares and financial assets are bought and sold depending upon the market conditions to seize the right opportunity to earn maximum profits out of the invested shares and assets. This job is done by the fund manager.
  • The shares that you own can be sold in the open market at the market price, and in this way, you can generate your own profit out of your investment. The investment of $1,000 can increase or decrease depending on the shares and financial assets that the fund manager has invested in.

Advantages

Some of the advantages are as follows:

Disadvantages

Some of the disadvantages are as follows:

  • To gain a considerable amount of returns from the investment, it requires a substantial amount of time for which the money invested needs to be locked out, which can be a minimum of five years or more.
  • They are totally dependent on the market and can result in a loss of investment.
  • Highly dependent on the decisions of the fund manager; hence the investor can have no control other than exiting from the investment completely.
  • The profit and dividend gained from investment trust are taxable and hence can reduce the actual returns that are gained from the investment.

Important Points

  • Investing in an investment trust fund allows the investor to gain ownership of the share or the financial asset that the money invested in.
  • In theory, the returns from investing in an investment trust can be humungous whereas, in reality, the returns are reliant on the performance of the share and assets in the investment trust and the market demand and supply of the shares and assets in the market.
  • Most they pay dividends for the shares usually once or twice a year, whereas investment trusts with an astounding performance can pay dividends on a monthly basis.
  • The dividends and the profits earned from an investment trust are taxable.
  • Gearing is a term that refers to borrowing money to invest more. Their fund managers can borrow money to invest more into the fund so that the returns are much higher and to get better leverage to pay for the borrowed amount.

Conclusion

This has been a guide to what is an investment trust and its definition. Here we discuss the factors that decide the value of investment trust fund along with an example, advantages, and disadvantages. You can learn more about auditing from the following articles-