Definition
An investment trust is a type of investment company that pools funds from shareholders to invest in a diversified portfolio of securities. These trusts typically focus on securities listed on stock exchanges, though some may also invest in unlisted companies. The primary aim is to generate profits through the income and capital gains from these investments.
Investment trusts are structured as private or public limited companies, not actual trusts, despite the name. They offer shareholders benefits such as risk diversification and professional management, similar to unit trusts. However, unlike unit trusts where investors own fund units but aren’t company shareholders, investment trust investors hold actual shares in the company.
Financial Structure and Taxes
One of the critical aspects of investment trusts is their financial structure and taxation. The profits of an investment trust are subjected to corporation tax at the full rate, which is the same rate applied to large, established firms. This means they don’t benefit from the lower tax rates available to some trading companies. Moreover, there are special provisions governing the distribution of dividends within these trusts.
Types of Shares
Investment trusts may issue different types of shares depending on their goals:
- Capital shares aim for high capital growth, focusing on increasing the value of the investments.
- Income shares focus on producing high income, ideal for investors seeking regular earnings.
Benefits
The primary advantages of investing in an investment trust include:
- Diversification: By pooling funds, these trusts invest in a broad range of securities, mitigating individual investment risks.
- Professional Management: Investors benefit from the expertise of professional managers who are well-versed in market trends and investment strategies.
Distinguishing from Unit Trusts
While both investment trusts and unit trusts serve to manage collective investments, the structure and investor rights differ significantly. Investment trusts offer shareholders actual shares in the company, possibly with voting rights and dividends, whereas unit trusts deal in fund units without direct stake in the management company itself.
Related Terms
- Unit Trust: A collective investment scheme that allows for the pooling of funds but involves buying units instead of shares.
- Corporation Tax: A tax on the profit of a company.
- Venture Capital Trust: A specialized type of investment company designed to provide capital for small expanding companies and offering tax incentives to investors.
- Capital Gains: The profit earned from the sale of an asset above its purchase price.
Recommended Reading
To delve deeper into the world of investment trusts and related financial instruments, consider exploring:
- Investment Trusts Handbook by Jonathan Davis - A comprehensive guide to understanding and utilizing investment trusts.
- The Intelligent Investor by Benjamin Graham - Although focusing broadly on value investing, this book offers foundational insights applicable to investment trusts.
In the complex tapestry of financial investments, the investment trust stands out as a beacon for those who seek to diversify and professionally manage their investment portfolio. Just remember, diversifying your investment portfolio can be like eating a box of chocolates; the more variety, the less likely you are to end up bitterly disappointed by any single piece!
