An investment trust is a company that pools money from many investors to buy stocks, bonds, real estate, or other assets

An investment trust is a closed-end fund structured as a public company. Investors buy shares in the trust itself, and the trust uses that money to purchase a portfolio of underlying assets — usually stocks, but sometimes bonds, property, or infrastructure. Unlike a mutual fund, which creates new shares whenever someone invests, an investment trust has a fixed number of shares that trade on a stock exchange like any other company stock.

The key difference from a mutual fund is that you do not buy shares directly from the trust. You buy them from other investors on the open market, which means the price can move above or below the actual value of the assets inside. This gap — called a discount or premium — is one reason investment trusts behave differently from mutual funds, even when they hold similar assets.

Key Takeaways

  • Investment trusts are closed-end funds that trade on stock exchanges, so their share price can differ from the value of their holdings.
  • You buy and sell investment trust shares through a broker, not directly from the trust, the same way you would buy any stock.
  • Investment trusts often pay dividends from the income their holdings generate, and some return capital to shareholders from reserves.
  • The trust is managed by a professional team, but you own shares in the company itself, not the underlying assets directly.
  • Investment trusts can use borrowed money to amplify returns, which increases both potential gains and potential losses.

How an investment trust raises and invests money

When an investment trust launches, it issues a fixed number of shares and sells them to raise capital. Once those shares are issued, the trust does not create new ones — the total share count stays the same. This is why it is called a closed-end fund. The money raised goes to a fund manager, who invests it according to the trust's stated strategy: perhaps UK large-cap stocks, emerging markets, infrastructure, or private equity.

After launch, you cannot buy shares directly from the trust. Instead, you buy them on the stock exchange from whoever currently owns them, using a broker. The same applies when you sell — you sell to another investor on the market, not back to the trust. This secondary market trading is what creates the discount or premium: if investors are pessimistic, they may sell shares at a price below the net asset value (NAV) of the holdings inside. If they are optimistic, they may pay more than NAV.

The difference between share price and asset value

Every investment trust has a net asset value (NAV), which is the total value of all its holdings divided by the number of shares. If a trust holds £100 million in stocks and has 10 million shares, the NAV per share is £10. But the actual share price on the stock exchange might be £9.50 or £10.50, depending on whether investors want to buy or sell.

When the share price is below NAV, the trust trades at a discount. When it is above NAV, it trades at a premium. This gap matters because it affects your return. If you buy at a 10% discount and the discount narrows, you make money even if the underlying assets do not move. Conversely, if you buy at a premium and it widens, you lose money on the discount alone.

Discounts and premiums change based on investor sentiment, the trust's performance, and how much people trust the manager. Some trusts consistently trade at a discount; others at a premium. This is one reason investment trusts can outperform or underperform their underlying holdings.

Who manages the trust and how they are paid

Each investment trust employs a fund manager — a person or team responsible for buying and selling the underlying assets. The manager is paid a fee, usually expressed as a percentage of assets under management (often 0.5% to 1.5% per year, though this varies widely). This fee comes out of the trust's returns before dividends are paid to shareholders.

The manager's job is to beat the benchmark — the index or peer group the trust is measured against. Some trusts are actively managed, meaning the manager makes frequent decisions about which stocks to buy and sell. Others are passively managed, tracking an index with minimal trading. The manager's track record and strategy are published in the trust's annual report and prospectus, which you can read before investing.

Investment trusts also have a board of directors, elected by shareholders, who oversee the manager and ensure the trust is run in shareholders' interests. This governance structure is one reason investment trusts are sometimes seen as more transparent than other pooled investments.

Dividends and how investment trusts return money to shareholders

Investment trusts typically pay dividends from the income their holdings generate — interest from bonds, dividends from stocks, or rental income from property. The trust collects this income, deducts costs and the manager's fee, and distributes what remains to shareholders. Some trusts pay dividends quarterly; others monthly or annually.

Many investment trusts also use a practice called revenue reserve, which allows them to smooth dividends across good years and bad years. If the trust earns more income than it distributes, it can hold the surplus in reserve. In a year when income falls short, it can draw on the reserve to maintain the same dividend. This makes the dividend more stable, but it also means some years you are receiving your own money back rather than new income.

Some investment trusts also return capital to shareholders, either as a one-off payment or as part of a regular policy. This is different from a dividend — it reduces the value of your holding but may be tax-efficient in some circumstances. Always check the trust's policy before investing.

Leverage and how it amplifies returns and risk

Many investment trusts borrow money to invest — a practice called gearing or leverage. If a trust has £100 million in shareholder money and borrows £20 million, it now has £120 million to invest. If those investments return 10%, the trust makes £12 million. After paying interest on the £20 million borrowed, the return to shareholders is higher than if the trust had only invested £100 million.

But leverage works both ways. If the investments fall 10%, the trust loses £12 million. After paying the interest on the borrowed money, the loss to shareholders is larger than it would have been without borrowing. Leverage amplifies both gains and losses, which is why geared trusts are riskier than ungeared ones. The amount of leverage a trust uses is published in its annual report and is usually expressed as a percentage of assets.

Not all investment trusts use leverage. Some are ungeared, meaning they invest only the money shareholders have provided. The trust's prospectus and factsheet will tell you whether it is geared and by how much.

Investment trusts versus mutual funds and ETFs

Investment trusts, mutual funds, and exchange-traded funds (ETFs) all pool investor money to buy assets, but they work differently. A mutual fund is open-ended, meaning it creates new shares whenever someone invests and redeems them when someone withdraws. You buy directly from the fund at its NAV, not from other investors. An ETF is also open-ended but trades on an exchange like a stock.

An investment trust is closed-end, so its share count is fixed and you trade on the secondary market. This means you can buy at a discount or premium to NAV, and the manager has more flexibility to hold illiquid assets (like private equity or infrastructure) because shareholders cannot demand their money back at short notice. Mutual funds and ETFs must hold more liquid assets to meet daily redemptions.

Investment trusts also tend to have lower ongoing fees than mutual funds, though this varies. They are also more transparent in some ways — the board and manager are named, and the holdings are published regularly. But they are also more complex: the discount or premium adds a layer of risk that mutual funds do not have.

Frequently Asked Questions

Can I lose more than I invested in an investment trust?

No, you cannot lose more than you invested in the shares themselves. However, if the trust is geared (uses borrowed money), losses can be magnified, so your investment can fall faster than the underlying assets. In extreme cases, a geared trust could theoretically wipe out shareholder capital entirely, though this is rare.

Why would I buy an investment trust instead of a mutual fund or ETF?

Investment trusts often have lower fees, can hold illiquid assets like private equity, and may offer higher dividends through revenue reserves. They also trade on exchanges, so you can buy and sell during market hours at a price you can see in real time. The trade-off is complexity: you need to understand discounts, premiums, and gearing.

What does it mean when an investment trust trades at a discount?

It means the share price is below the net asset value of the holdings inside. This can happen when investors are pessimistic about the trust's prospects or the market generally. A discount can be an opportunity if you believe the discount will narrow, but it also reflects real investor concerns about the manager or strategy.

Do I pay tax on investment trust dividends?

Yes. Dividends from investment trusts are taxed as income in the year you receive them, though the rate depends on your personal tax situation and whether you hold the trust in a tax-sheltered account like an ISA. Capital gains when you sell the shares are also taxable. Check the trust's annual report for details on how much of each distribution is income versus capital.

How do I buy and sell investment trust shares?

You buy and sell through a stock broker, the same way you would buy any listed company stock. You need a brokerage account, and you place an order to buy or sell at the current market price. The broker charges a commission or spread on each transaction. Some platforms offer investment trusts with lower or no dealing charges if you hold them long-term.