Investment trusts

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11. Factors to consider when choosing an IT

We have looked at the factors affecting an IT's share price, and noted that a key criterion is whether they are trading at a discount or a premium to their net asset value. This is a factor, but for people investing over the medium to long term, it should not be the decisive one.

• For a start, an IT trading at a very large discount may be that way because the market knows something about that IT's exposure that you don't. So be careful about ITs whose discount is much larger than other ITs in the same sector.
• In general, private investors should not invest a large lump sum in an IT that is trading at a premium. If you are investing through a savings plan, your purchases will be spread over time and you will probably find that at times the same trust will be trading at a discount. On average the two will balance each other out.

Other factors to consider are:

1. What is your time horizon?

   ITs are generally best suited to people investing for the medium to long-term. If you think you need access to your money (in cash) inside 12 months, ITs, and in fact the stock market in general, are probably not the best place for your money.

2. Are you investing for a specific reason?

   If you are saving for retirement, for your grandchildren, for school fees, or as part of your personal pension, it is important that you choose the right class of share in the right IT and that you invest in a way that minimises costs. You should discuss your options with a specialist fund manager before making a decision.

3. Do you need a specific sum of money at a specific future date?

   Shares in ITs go up and down, which means that you cannot be sure how much your investment will be worth at the time you choose to sell. But if you need to know this - if, for instance, you need £25,000 for a deposit on a new house in three years time - you can choose Zero Dividend Preference Shares in an IT. They don't pay any income, but they do offer a specific capital sum when the IT winds up.

4. How much risk are you prepared to accept?

   Different types of trust have different risk profiles. International General Trusts are regarded as the least risky, whereas sector specific trusts (e.g. internet shares) are regarded as more risky. The rule is: the bigger the potential upside, the greater the risk; and vice versa.

5. Do you want income or capital growth?
6. Do you want exposure to a specific geographical area of industry sector?

1. What are investment trusts? 2. What does an IT do? 3. Difference from unit trusts 4. IT specialisation 5. Tax advantages 6. Discounts: the share price of ITs 7. Gearing 8. Split capital trusts 9. Warrants 10. Ways of investing in an IT 11. Factors to consider when choosing an IT 12. Where to find information about ITs 13. Conclusion