Investment trusts are fairly old financial entities, with some of the first trusts dating back to 1868. Despite their age, the investment trust model still carries significant advantages for investors in today's global market. Understanding some of the basics of a investment trust and its key advantages is important for anyone considering this portfolio option.
An investment trust is a type of fixed portfolio investment that is solid in a limited number of shares -- or units -- to individual investors. It is similar in many ways to a mutual fund or hedge fund, but has some notable differences. According to Morgan Stanley, iinvestment trusts "are different from mutual funds in that the underlying securities are not actively traded." This means that the purchases made by the investment trust on its investors' behalf are not shares normally available on the public market.
Like mutual funds and hedge funds, investment trusts offer the advantage of diversification to their buyers. Diversification is a means of hedging risk by selecting investments from a number of different financial sectors and instruments. Investment trusts often buy shares of companies, corporate and government bonds and sometimes real estate. Diversification limits an investor's exposure to any single sector while providing them with the potential for returns from a number of different markets.
The money placed in an investment trust is used to capitalize a fixed portfolio. Unlike mutual funds or hedge funds, "securities in the trust will not be sold to take advantage of market conditions," according to Wells Fargo. For some investors, this is a key advantage because they are given the ability to always know what they own. With mutual funds or hedge funds, their exposure to particular industries or companies might change over time, which can sometimes mean surprises when market conditions fluctuate.
Affordability and Liquidity
Units of investment trusts are bought and sold to investors from their inception to their termination date. This offers their purchasers two distinct advantages: discounts and liquidity. Investors that need to get money out of the trust before its termination can easily do so by selling their units to other investors, providing them with similar liquidity to stocks or commodities. Depending on market conditions, the value of the assets in an investment trust may exceed the cost of buying into it, which offers investors a significant discount. In this way, the trust may provide investors a means to place their money in a more diversified portfolio than they'd usually be able to afford.
- Investment Company Institute; A Guide to Unit Investment Trusts; 2007
- Foreign and Colonial Investment Trust; History; 2011
- Morgan Stanley Smith Barney; Unit Investment Trusts; 2011
- Wells Fargo Advisors; Unit Investment Trusts (UITs); 2011
- "The Times of London"; The Beginner's Guide To Investment Trusts; David Budworth; 2010
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