Thinking about putting your money to work but unsure where to begin?
Many people are in the same boat and looking for simple, trusted ways to grow their wealth over the long‑term and generate an income. Investment trusts can be a clear, well-governed route into financial markets . If you want to take the first steps to invest with confidence, understanding how they work and the risks involved will help. In this guide we explain what is an investment trust, the features that make them different, and how Schroders can support you as you think about starting to investing.
Caution is understandable, but waiting for the perfect time often means missing out. Time in the market matters because compounding does the heavy lifting. When income is reinvested, returns can generate further returns, which can add up significantly over the long term. Even modest annual gains, left to grow, can make a meaningful difference over years and decades.
Holding some cash is sensible for short-term needs, but if held for longer-term goals, inflation can erode its real value as rising prices reduce what that money can buy over time. Shares and other real assets have historically delivered higher long-term returns, though they can be volatile. A regular plan can help. By investing a set amount at fixed intervals, you naturally buy more when prices are lower and less when prices are higher. This approach, often called pound‑cost averaging, can smooth the ride and reduce the risk of poor timing.
It’s a public limited company that owns a portfolio of assets and is listed on a stock exchange. It’s often described as “closed‑ended”, all this really means is there is a fixed number of shares in issue. Investors buy and sell those shares on the market rather than the trust creating or cancelling shares each day. This lets managers maintain a long-term focus without dealing with daily money in and out.
There is an independent board of directors that oversees the trust on behalf of shareholders. The board sets the mandate, monitors the manager, and makes changes where it believes this is in shareholders’ best interests. This governance framework helps support robust, long-term decision making and transparency for shareholders.
Two values matter. Net Asset Value (NAV) is the value of the underlying portfolio, minus any liabilities, per share. The share price is set by the stock market and can trade at a discount (below NAV) or premium (above NAV). Discounts and premiums reflect investor sentiment, liquidity and expectations for performance. They can create opportunities but bring another source of price movement to consider.
Some trusts use gearing, which means borrowing to invest. Gearing can boost gains in rising markets because more capital is invested, but it can also magnify losses when markets fall. If you want to take the first steps to invest, investment trusts could be a good place to start, make sure you understand how much gearing a trust can use and how it is managed.
1) Investors are shareholders 👥
Once you’re invested, you become a shareholder in the company. This means you have a say in how the company is run, from its investment policy to the re-election of directors.
2) Easy to track 📈
Investment trusts are transparent. You can see where your money is invested through regular updates from fund managers and track performance daily on the stock market.
3) Higher standards support investor protection 🏛️
Despite their name, investment trusts aren’t trusts – they are limited liability companies with ordinary shares listed on the London Stock Exchange. They are required to produce regular financial reports and must act according to strict regulations.
4) Invest in the best 🎯
Investment trusts are closed-ended, which means that they do not need to sell assets to pay investors who wish to exit the fund. This structure means the fund managers can maintain a long-term investment strategy without any disruption.
5) Easy to buy and sell 🔄
Investment trusts trade on the stock exchange, so they are liquid like other publicly traded shares. As a result, investors can buy and sell their shares whenever they want.
6) Gearing advantage ⚙️
Unlike collective investments, such as unit trusts, investment trusts can borrow money. This means the fund manager has easier access to capital to invest in high-conviction investment ideas.
7) Smoothing dividends 🌊
In contrast to open-ended funds, investment trusts can keep up to 15% of their dividend income in reserve each year rather than paying it all out immediately. They can then use this reserve to supplement income payments in future years.
All investments carry risk. For investment trusts, consider the following:
- Market risk: the value of the underlying assets can move up and down.
- Currency risk: If the fund’s investments are denominated in currencies different to the fund’s base currency, the fund may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
- Discount volatility: the share price can move relative to NAV, adding extra price movement.
- Gearing risk: borrowing can amplify both gains and losses.
- Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
- Share Price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
Costs matter because they compound. Look at the ongoing charges figure, any performance fees and trading costs. Lower fees are not always better if they limit resources or expertise, but knowing the all‑in cost helps set realistic expectations.
Due diligence can be straightforward. Check the mandate and objectives to see if they match your risk tolerance and time horizon. Review performance across different market conditions, the manager’s investment process, team stability and the strength of the independent board. Look for alignment through manager co‑investment, board shareholdings and clear policies on managing discounts and premiums. Strong reporting and portfolio disclosure build understanding and confidence.
Shares in investment trusts are listed on the London Stock Exchange. Ordinary shares in each company can be bought and sold through a stockbroker, accountant, independent financial adviser or a share dealing service provided by many banks or buildings societies.
We recommend you seek financial advice from an independent advisor before making an investment decision. If you don't already have one, you can find one at www.unbiased.co.uk.
Schroders has a long history of managing investment trusts for UK investors
Let us help you take the next step
Our range is designed to support different needs - whether you’re looking for income, capital growth or both.
We want to make it easier to start investing. You can access monthly factsheets, annual and interim reports, portfolio holdings and performance commentary, alongside clear disclosures on fees and gearing.