Learn more about how investments trusts and get the impartial information you need to decide whether an investment trust is the right investment vehicle for you.
The easiest way to understand closed-ended funds, or investment trusts, is to think of them as a company. This is because that is exactly what they are. Just like any other company, they issue shares to raise money from shareholders and then invest that money. The difference between investment trusts and normal "trading" companies, is that they invest their money in the shares of other companies rather than in physical assets such as factories or grocery stores or mobile phone networks. Since they are like a company, they are also able to borrow money to invest (which is not allowed for unit trusts). However, only a few take advantage of this to any significant extent.
How They Work and Charging Structure
You buy the shares in the same way as you would a normal company, that is, by contacting a stockbroker. Some of the larger investment trusts also run schemes whereby you can invest regular amounts or lump sums via an ISA.
Since you buy investment trust shares just as you would shares in a normal company, the charges are generally the same also. So, you suffer stockbroker's commission on buying and selling. In a way, this is comparable to an initial charge and an exit charge on a unit trust. However, if you use a cheap broker, they should be relatively small. On top of commission, you lose a small amount as the difference between the bid and offer prices of the shares of the trust. However, again, this tends to be a relatively small amount. You also have to pay stamp duty of 0.5% on purchases.
In addition to these charges for buying and selling investment trust shares, you pay an annual management fee and other ongoing administration costs. The full amount of these is probably a little more difficult to work out than those on unit trusts and OEICs, because the figures are buried in the accounts. However, they tend to be lower than the charges on unit trusts. This is because they have lower costs. For a start, they're generally not allowed to advertise which saves them money. On top of this, they don't have to deal with money coming into and leaving the fund which open-ended funds like unit trusts have to deal with. Finally, because, as companies, they have to be run in the interests of their shareholders, their management charges are strictly controlled by the directors. The effect of this is that as the investment trusts get bigger, they cost proportionately less to run. The largest investment trusts tend to have very low charges.
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