I believe acquiring investment trusts is one of the best ways to invest in a diversified basket of stocks. In addition, investment trusts are different to traditional investment funds because they’re closed-ended.
Unlike open-ended funds, trusts tend to have a fixed number of shares in issue, which means the shares can trade at a premium, or discount, to the net asset value of the underlying investment business. Therefore, investors can buy the trust at a discount to its net asset value.
Meanwhile, they also have more flexibility when it comes to dividends. Investment trusts can hold back a percentage of their revenues received every year. Managers can then use this at a later date to fund dividends.
These reserves were particularly handy last year when many companies cut their dividend payouts. Most investment trusts were able to dig into their reserves to fund their own dividends.
These are some of the reasons why I like investment trusts. Here are two trusts I’d buy today for my portfolio.
Investment trusts to buy
Another reason to own investment trusts is that they can offer a good way for investors to gain access to regions they may not be able to access on their own. The JP Morgan Indian (LSE: JII) is a great example. This company invests in a diversified portfolio of equity and equity-related securities of Indian corporations.
I think India has the chance to be one of the fastest-growing economies in the world over the next few decades. It has a young and growing population, with increasing education levels and growing wealth. However, I wouldn’t know where to start investing in the country. That’s why I’d buy JP Morgan’s Indian offering.
Its top holding is Infosys, a global leader in next-generation digital services and consulting with operations worldwide. It also has investments in Indian housing corporations, construction companies and banks. The investment trust currently trades at a 14% discount to its net asset value.
This trust’s concentrated portfolio may put some investors off. For example, it has 20% of assets invested in its top two holdings. This high level of concentration could expose investors to risks and losses if the companies in the portfolio don’t perform as expected.
The other stock I’d buy for my portfolio of investment trusts is Mercantile (LSE: MRC). This investment firm has a UK focus. Specifically, the fund managers focus on buying mid-cap UK companies. Two of the top holdings are Bellway and Games Workshop.
I like this trust because it offers the chance to invest in a diversified portfolio of mid-cap, high-quality UK growth stocks at the click of a button. The stock also currently offers a dividend yield of 2.4%. Further, it trades at a discount of 5% to the net asset value.
This might not be suitable for investors who aren’t interested in the UK. Risks such as a sluggish recovery from the coronavirus pandemic and Brexit-related disruption could hold back the returns on UK equities as we advance.
Despite these risks, I’d buy the stock from my portfolio of investment trusts.
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Rupert Hargreaves owns shares in the Mercantile Investment Trust. The Motley Fool UK owns shares of and has recommended Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.