Investment trusts explained

An investment trust is a company, listed on a stock exchange, whose business is investing in other things. When you invest in one, you buy its shares and become a shareholder in that company, just as you would with any other listed business¹. Your money is pooled with other investors' and managed by a professional fund manager, giving you a share in a much larger portfolio than you could assemble yourself¹.

Investment trusts are the oldest form of collective investment: the first one was founded in 1868 and still exists today³. They are sometimes called investment companies, because each one is a company in its own right with an independent board of directors¹. Most UK investment trusts are listed on the London Stock Exchange⁴.

What marks them out from the unit trusts and OEICs most people hold in their ISAs is the closed-ended structure: a trust issues a fixed number of shares, and those shares are then traded between investors on the market⁵. That single feature drives most of what follows on this page, including the discount, the gearing and the dividend smoothing.

An investment trust is a listed company that invests for you

An investment trust is set up as a public limited company (plc). Its shares are listed on a stock exchange, and it has a board of directors who oversee the operation of the fund¹¹. Each trust has a fund manager making day-to-day decisions, and most are managed by an external management group selected by the board⁴.

The point of the arrangement for an investor is pooling. A single investment gives you a share in a broad portfolio of shares and other assets, which spreads risk and minimises the impact of any one company going bust or performing badly¹². Investment trusts also let you access investment opportunities you would not find on your own, such as infrastructure or private companies³.

UK investment trusts are listed companies based in the UK which meet certain conditions, such as paying out a certain amount of the income they receive from their investments². Although "trust" is part of their name, they are not trusts in the legal sense but a separate legal entity or company¹³. They are regulated by the UK Financial Conduct Authority¹³.

When you invest, you become a shareholder with the same rights as any other shareholder in a publicly listed company, including the right to vote at the annual general meeting¹⁴. The board's duty is to look after your interests as an investor, by ensuring the trust is as successful as possible⁴.

Closed-ended shares: why the price is not the value

Unlike an OEIC or unit trust, investment trusts are closed-ended: there is a fixed number of shares available⁹. The trust issues a set number of shares which are then traded by investors¹¹. When you want out, you sell your shares to another investor on the stock market, rather than the company cancelling your holding and returning your money, as an open-ended fund does.

Because shares change hands between investors, the price is determined by supply and demand in the stock market, and prices change constantly while the stock market is open⁷. The price you pay almost invariably differs from the net asset value (NAV) per share, which is the value of all the trust's assets, less liabilities such as any debt, divided by the number of shares⁴.

This is the practical difference from an open-ended fund. A unit trust or OEIC prices each unit directly from the value of the underlying assets, so the price you deal at always reflects that value. An investment trust's price reflects what buyers will pay and sellers will accept, which can be more or less than the assets are worth. The closed-ended structure also means the manager does not have to sell holdings to pay back withdrawing investors, which is one reason trusts can hold harder-to-sell assets³.

Investment trusts have frequently outperformed open-ended rivals in the past, which can sometimes be explained by a combination of lower costs, the closed-ended structure and gearing⁷.

Discounts and premiums to net asset value

When demand is strong, the shares can be worth more than the NAV: the trust is then trading at a premium. When the shares are worth less than the NAV, the trust is trading at a discount⁸. More often than not, investment trust shares tend to trade at a discount⁸.

The worked example the AIC uses shows how the numbers are read, with a NAV of 100p per share²:

The level of discount or premium tends to vary by sector and changes with market sentiment⁷. A wide discount can look like a bargain, since you are buying assets for less than their stated value, but there is no guarantee that any discount will have narrowed by the time you come to sell: if the discount widens, you lose out in relative terms even if the underlying assets have held their value⁷. A premium works the other way: you pay more than the assets are worth, and the premium can close against you.

The discount also matters when a trust is wound up. If shareholders vote to wind up the trust, the underlying assets are sold off and shareholders receive their money back at a price that closely reflects the NAV¹⁴. A persistent discount is one reason shareholders sometimes vote for exactly that.

Gearing: borrowing that magnifies gains and losses

Investment trusts can borrow money to make additional investments. This is called gearing⁸. The more a trust borrows, the more risky it is⁴. Being able to gear is an advantage investment trusts have over other kinds of fund, such as unit trusts, which are not permitted to borrow to invest⁴.

Gearing is the use of borrowed money to increase the size of an investment¹⁶. In rising markets it can help to boost performance; when markets fall, it can amplify losses¹⁶. Interest must be paid on the borrowing whether the trust profits or not¹².

As an illustration, if you have £1,000 invested and the manager gears by 10%, that equates to £1,100 working for you in the investment¹⁸. The same leverage works in reverse when the portfolio falls.

Gearing is often expressed as a rating. A gearing rating of 100 means the trust has no borrowing; a rating of 110 means your gains or losses will be magnified by 10%, that is, gearing of 10% of total assets⁷. The AIC publishes details of each trust's gearing policy, so you can check how much a trust borrows before investing⁷.

Investment trusts can usually borrow at lower rates of interest than you would get as an individual, for example through an ordinary bank loan or by issuing special kinds of shares that work like IOUs⁴. That does not change the essential trade-off: borrowing increases both the upside and the downside.

Income and dividend smoothing: up to 15% held back

Investment trust boards can hold back up to 15% of the income from the underlying assets in a year⁹. The trust is allowed to hold some dividends in reserve, keeping income back in good years to pay out in leaner ones¹⁴. This technique, known as smoothing, has allowed some investment trusts to raise their dividend payments for more than 50 years in a row¹⁴.

This is something open-ended funds generally cannot do, and it is one of the reasons trusts are popular with income investors. The dividends paid by investment trusts and other companies can still fluctuate, so smoothing is a cushion rather than a guarantee¹⁹.

Dividends can be reinvested in further shares, which can significantly enhance returns over the long term²¹. How dividends are taxed depends on where the trust's shares are held, which is covered under how investments are taxed. Real estate investment trusts are a special case: shareholders pay income tax, as opposed to dividend tax, on the distributions made to them, although no tax is paid on the distributions if the REIT shares are held in an account such as an ISA or a SIPP².

What investment trusts can invest in

Investment trusts can invest in a much wider range of investments than other types of fund. In fact, they can invest in almost anything: mainstream global companies, specific regions, smaller companies, sectors like technology or commodities, and assets such as property or infrastructure⁴. They can invest in both public and private companies²².

The Association of Investment Companies (AIC), the trade body that represents investment trusts, classifies them into more than 30 different sectors, usually based on regional focus, industry focus, or the trust's investment objective⁷. Example sectors include UK Growth, Global Growth, Europe, Asia Pacific, Infrastructure, Property and Private Equity⁷. Ethical investment trusts are also available⁷.

Specialist areas carry their own risks. Real estate investment trusts are riskier than other trusts, in part because it is harder to sell the underlying real estate investments if investors withdraw their money²⁴. Venture capital trusts are higher risk than most other investment trusts because of the companies they invest in, and are generally more suitable for experienced investors²⁵. VCTs are typically very high-risk investments, where losses could eclipse the tax savings²⁶. The dedicated page on venture capital trusts covers those in full.

Charges: ongoing charge, dealing fees and 0.5% stamp duty

Most investment trusts quote an ongoing charge, which is the estimated annual charge of holding the investment trust, including the annual fee paid to the fund manager plus regular recurring costs such as directors' fees and audit fees¹⁷. The AIC calculates it using costs for the last financial year, divided by the net assets of the company to produce a percentage figure¹⁰. Performance fees are not included in the ongoing charge, though they appear in the Key Information Document¹⁷.

Most annual management charges fall somewhere between 0.5% and 1.5%¹⁰. Which? puts the range for most investment trusts at 0.8% to 1.8%²⁷. Investment trusts that invest in more specialist assets, such as property, private equity or infrastructure, are likely to have higher charges than those investing in conventional assets such as shares or bonds²⁸.

Two further points on cost. First, investment trusts are treated by investment platforms in a similar way to shares, so you will likely pay one-off fees when you buy and sell trusts, even if fund trading on the same platform is free⁷. Second, stamp duty of 0.5% of the purchase amount is payable when you buy shares in UK-based investment trusts, and only when you buy, not when you sell¹⁰.

Performance figures published for investment trusts are almost always given on a total return basis, meaning dividends received are considered to have been reinvested³⁰. Costs paid by the investor which are external to the trust, such as stamp duty or fees for buying and selling the shares, are not included in those figures³¹. Investment trust fees tend to be lower than those for a unit trust or OEIC, although that advantage has narrowed in the last few years⁹.

How to buy investment trusts: platforms, ISAs and SIPPs

Investment trusts are bought through an investment platform: an online service that allows you to buy, hold and sell the shares³². Most UK investment trusts can be bought and held within an ISA or SIPP¹⁷. Many platforms offer the ability to hold your investments inside an ISA, SIPP or Junior ISA, and all platforms will also offer an ordinary trading account with no special tax benefits, sometimes called a general investment account³³. A few platforms do not offer investment trusts at all, so it is worth checking before opening an account³².

The process for buying is the same as for any listed share:

1. Open an account with a platform that offers investment trusts, choosing an ISA, SIPP, Junior ISA or general investment account.
2. Pay money into the account.
3. Search for the trust by name and check the share price, discount or premium, and ongoing charge.
4. Place an order for the number of shares you want, or set up a monthly savings plan.
5. Pay the dealing fee and, for UK-based trusts, the 0.5% stamp duty on the purchase¹⁰.

You can invest in investment trusts from as little as £50 a month²⁰. Some platforms restrict monthly savings to trusts listed within an index such as the FTSE 350¹⁷. Investment trusts can also be a simple and cost-effective way of investing for children, with lump sums, regular savings and reinvested dividends all possible²¹; the page on investing for children covers the account options.

Holding trusts inside a Stocks and Shares ISA means no tax on the returns. A stocks and shares ISA is a tax-free investment account that lets you put money into a range of different investments³⁵. Under current law, only authorised or recognised funds may be held in a stocks and shares ISA³⁶. Funds invested in a stocks and shares ISA can only be transferred to another stocks and shares ISA, whereas cash ISA funds can transfer to either type³⁴.

Who investment trusts are not suitable for

Investment trusts are not suitable for everyone. The AIC's guidance lists the circumstances in which another investment may make more sense. An investment trust may not be for you if you¹⁵:

• have an investment time horizon of less than five years;
• need a guaranteed return;
• need a guaranteed income;
• cannot accept the risks that come with gearing and discounts;
• want the price you deal at always to match the underlying asset value.

Investment trusts are more risky than bank savings accounts, though they offer the chance of a growing income and potentially capital growth too¹⁹. They are considered to be slightly riskier than other types of fund, such as unit trusts⁹.

Investment is not suitable as a way to get out of debt¹⁹. If you are struggling with bills or debts, free debt advice from a charity such as StepChange is the place to start, not the stock market. The pages on investment risk and investing vs saving set out the trade-offs in more detail.

Your rights as a shareholder and the independent board

Investors in investment trusts have the same rights as any other shareholder in a publicly limited company¹⁴. Each individual shareholder receives voting rights, which enable them to attend the annual general meeting¹³. As a shareholder you can vote on issues at the trust's AGM, table motions, call for extraordinary general meetings and vote in new directors⁴.

Trusts are overseen by an independent board of directors, who ensure the investment trust is being managed in line with its objectives¹⁸. The directors meet several times a year and answer to the shareholders⁴. This is a structural protection open-ended funds do not have in the same form: the board, not the manager, decides matters such as whether to keep or replace the manager, and can recommend a wind-up or restructuring if performance or the discount warrants it.

If shareholders vote to wind up the trust, the underlying assets are sold off and shareholders receive their money back at a price that closely reflects the NAV¹⁴. The page on when a fund changes objective, merges or closes covers what happens when pooled investments change shape.

If something goes wrong with an investment held in an ISA, the Financial Ombudsman Service can consider complaints about ISAs³⁷. Complaints about investment trusts themselves are rare: the ombudsman's data for the first quarter of 2026/27 recorded 42 complaints opened about investment trusts. The pages on mis-sold investments and what happens if a platform fails cover where protection starts and stops.