2.2.6 Investment Trusts
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Investment trusts are pooled or collective investments which allows
smaller investors to join with others to benefit from economies
of scale on a spread of risk. They are themselves constituted as
companies, which are quoted on the Stock Exchange. Investors therefore
buy shares rather than units as in unit trusts, and the price of
shares will reflect the normal laws of supply and demand rather
than simply underlying asset value. The number of shares in issue
normally remains constant.
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Investment trust shares can be traded at a price which is more
or less than the value of the underlying investments. The trust
is said to be trading at a premium or at a discount respectively
in these circumstances. This adds a further potential for profit
or loss for the investor, as not only can the underlying investments
increase or decrease in value, but the discount or premium can widen
or narrow.
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The companies invest, generally in equities, and the investments
are professionally managed. The investment trust has no capital
gains liability, but the investor would be liable to CGT on encashment
if a gain arose. Also, dividends are distributed subject to 10%
income tax deduction.
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Investment trusts carry a slightly higher risk/reward level than
unit trusts. This is partly because of the premium/discount situation,
and partly because investment trusts, unlike unit trusts, are usually
able to borrow in order to gear up their investment performance,
i.e. borrowing to make additional investments.
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Additionally there are split level trusts, where different share
classes have different rights to income and/or capital growth. These
are primarily for the specialist investor.
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Investment trusts may be appropriate for those seeking a spread
of investment risk, or regular savings, or lump sum investment,
for medium to long term investment
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