Your Guide to Investment Trusts: What, Why, and How

The basics of Investment Trusts

Investment Trusts have a rich history, with some dating back over 150 years. Their ability to grow wealth over the long term and generate reliable income has made them a popular and enduring investment option.

At their core, Investment Trusts are collective investment vehicles which function similarly to a mutual fund

. They pool together the money of investors (the trust's shareholders) and professional fund managers then invest this money in a diversified mix of assets - such as shares, bonds, or property - according to the investment aims of the particular trust.

Unlike mutual funds, Investment Trusts are structured as closed-ended companies, meaning the number of shares available at any one time is fixed. This structure can lead to shares trading at a premium

or discount to the value of the underlying assets (NAV), depending on investor demand.

Investment Trusts can suit a range of different investment styles and goals. You can choose trusts that focus on specific regions, such as Europe, the US, or emerging markets, or sectors like technology, healthcare, renewable energy, or infrastructure. There are also trusts that focus on niche areas like property or care homes, providing exposure to investments that may be otherwise difficult to access or trade ("illiquid

").

One of the key benefits of Investment Trusts is their potential to provide regular income. Many trusts pay cash dividends

, which is why they're popular with income-seeking investors such as retirees. Investment Trusts can also retain income in strong years, allowing them to continue paying dividends during more difficult periods - a feature known as dividend smoothing.

In summary, Investment Trusts offer a flexible, expert-led way to invest in a variety of markets and sectors, with the added bonus of potentially generating a regular stream of income too.

Are Investment Trusts right for me?

The pros of Investment Trusts

✅ Potential for higher returns

Investment Trusts can borrow money to try and boost returns with a process called “gearing

.” If the trust’s underlying investments do well, borrowing can help make magnify the gains. Also, because Investment Trusts don’t have to sell investments when shareholders take their money out (unlike other types of fund), the manager has the freedom to focus on long-term growth without being forced to react to short-term panic. So investors also benefit from having an expert at the helm with the discretion to make informed decisions to maximise profit. We explain more about gearing in the next section.

✅ Reliable income

Many Investment Trusts are known for providing a steady income, thanks to something called “dividend smoothing.” Unlike regular funds, which have to pay out all the income they earn each year, Investment Trusts are allowed to hold back up to 15% of that income. They can stash it away in a reserve during the good years and then use those reserves to top up payouts in tougher years, when income might dip.

This creates a smoother, more reliable stream of income for investors. It’s especially useful for people who rely on dividends to pay the bills, such as those in retirement, or anyone who simply prefers a consistent drip of income rather than big highs and lows. Some trusts have done this so well that they’ve managed to increase their dividend every single year for decades, even during financial crises and market crashes.

✅ Independent oversight

Every Investment Trust has its own independent board of directors and their job is to make sure everything’s running as it should. Think of them like a watchdog or a built-in quality control team. They don’t manage the money directly, but they do oversee the fund manager

, making sure they’re sticking to the trust’s strategy and doing a good job for investors.

If the trust is performing badly, taking too much risk, or drifting away from its stated goals, the board can step in, ask tough questions, and even replace the manager if needed. It’s their job to put investors’ interests first and hold the manager accountable. This kind of independent oversight is a big plus for Investment Trusts and not something you always get with other types of funds.

The cons of Investment Trusts

❌ More complex pricing

Investment Trusts are listed on the stock market, which means you buy and sell them just like shares. But here’s the catch: the price you pay isn’t always the same as the value of what the trust actually owns - known as the Net Asset Value (NAV).

Sometimes, a trust’s shares trade at a premium, meaning you’re paying more than the total value of its assets. Other times, they trade at a discount, which means you’re getting the assets for less than they’re technically worth. That can sound like a bargain (and sometimes it is), but it can also be a sign that something’s not right - like poor performance or low demand.

This adds an extra layer of complexity, especially for newer investors. You’re not just looking at how the underlying investments are doing, you also have to think about how the market feels about the trust itself, which can affect the price.

❌ Volatility from gearing

Gearing can boost returns when markets are rising, as the trust has more capital working for it. But it cuts both ways. If markets fall, gearing can amplify losses, because the trust still owes what it borrowed. That means a small market dip can lead to a bigger hit to your investment.

Think of it like going downhill on a bike - fast and fun when things are smooth, but risky if you hit a bump.

Not all trusts use gearing, and those that do vary in how much. If you're risk-averse, nearing retirement, or might need your money soon, a geared trust may not be the right fit. Always check before you invest - the Association of Investment Companies (AIC) is an industry body which represents trusts in the UK and is a great place to start your research.

In terms of how this may look when you're doing your research, here's an example of how prominent asset manager

BlackRock displays the gearing percentage of its Income and Growth Investment Trust plc as part of its fund information factsheet:

Source: BlackRock, correct as at April 2025.

❌ Liquidity can be patchy

Some Investment Trusts, especially smaller or niche ones, don’t trade very often. This means it might be harder to sell your shares quickly when you want to (illiquid). If there aren’t many buyers, you could be forced to accept a lower price than you hoped for.

In simple terms, it’s like trying to sell a rare item that not many people want right now. This can make your investment less flexible, which might be a problem if you need cash quickly.

If you’re new to Investment Trusts, it’s worth checking how often a trust’s shares trade before buying. Larger, more popular trusts usually have better liquidity, making it easier to buy and sell without a hassle. Here's a breakdown of what to look for:

Top questions on Investment Trusts

What’s the difference between an Investment Trust and a fund?

The main difference is how they’re structured and how they handle money coming in and out.

• Mutual funds are open-ended, which means new units are created when more people invest, and units are cancelled when people sell. The fund manager has to buy and sell assets to match this flow, which can be disruptive - especially in a market wobble.

• Investment Trusts, on the other hand, are closed-ended. There’s a fixed number of shares, which trade on the stock market like any listed company. This structure gives the manager more control, as they don’t have to constantly juggle the portfolio to meet withdrawals. It also introduces an extra layer - shares can trade at a discount or premium to the value of the trust’s assets.

What does buying at a discount mean?

Every Investment Trust has a Net Asset Value (NAV) - the total value of all its investments, divided by the number of shares. But because Investment Trusts are traded on the stock market, the share price is set by supply and demand.

• If the share price is below the NAV, the trust is trading at a discount. You’re buying assets for less than they’re technically worth - a potential bargain.

• If the price is above the NAV, that’s a premium - you’re paying extra, perhaps because the manager has a stellar track record or the trust is trendy.

Discounts and premiums can widen or narrow over time, adding another element of potential gain or loss.

How to know if an Investment Trust is performing well

To check how well an Investment Trust is really doing, start by looking at its NAV, which shows the total value of everything it owns. Next, compare this NAV to the price you see on the stock market. If the share price is higher than the NAV, the trust is trading at a premium; if it’s lower, it’s at a discount.

But to understand the trust’s real performance, don’t just look at the current share price - check how the NAV has changed over time, and see how the trust’s investments are performing compared to similar trusts or the wider market. Also, read up on why the trust might be trading at a premium or discount, as this can give you clues about investor confidence or possible problems.

By looking at both the NAV and the share price, you get a clearer picture of the trust’s underlying strength and how the market feels about it.

Do Investment Trusts pay dividends?

Many do - and some are particularly popular with income investors for this reason.

Investment Trusts can retain up to 15% of the income they earn each year and hold it in a revenue reserve. This acts like a rainy-day fund to top up dividends when times are tough - say, if the underlying companies cut or cancel dividends during a market downturn. This is called "dividend smoothing".

This allows some trusts to maintain or even increase their dividend payments year after year, which is when you’ll hear about “dividend heroes” - trusts with a decades-long track record of growing their payouts.

What are the most popular Investment Trusts in 2025?

Curious where other investors are putting their money right now? Each month, we go straight to the source - top UK platforms like AJ Bell, Fidelity, Hargreaves Lansdown and interactive investor - to find out which Investment Trusts are trending.

Whether you're after inspiration, reassurance, or just a nosey peek at the crowd favourites, our regularly updated list reveals which trusts are winning the popularity contest. Click below to see the latest chart-toppers and discover the Investment Trusts investors are backing this month.

Key takeaways on Investment Trusts

🧺 Expert-run basket of investments

Investment Trusts give you instant access to a ready-made portfolio, professionally managed and listed on the stock exchange. They’re ideal if you want long-term exposure to a range of assets without having to pick and mix dozens of individual assets yourself.

📉 Unique structure brings opportunity - and complexity

Because Investment Trusts are closed-ended and trade like shares, they can offer unique benefits like dividend smoothing. But you’ll also need to get to grips with concepts like discounts, premiums, and gearing - all of which can affect performance and are not always a good thing.

🧠 Best for confident, long-term investors

On the whole, trusts are not beginner-level “set it and forget it” products. They’re better suited to investors who are comfortable with a bit more risk and prepared to do some research - or at least know when to sit tight during the wobbles.