Don't be a hostage to fortune

Unless you have the gift of prophecy, a punt on company shares does not make a lot of sense without the money to build up a sizeable portfolio. Few people have the foresight of Nostradamus, which is one of the reasons why pooled investments are so popular.

The principle is straightforward: if a lot of people put their money together and invest as a group, they can buy a wide range of shares and spread the risk. This form of investment is extremely popular.

There is more than pounds 138bn invested in unit trusts, the UK's most popular form of pooled investment. But their much older cousins, the investment trusts, have attracted pounds 48bn and offer an attractive alternative.

An investment trust is a company that has its shares traded on the Stock Exchange. Instead of making hair spray or running airlines, investment trusts buy shares in other companies. Their profits come from the dividends paid on the shares they own and the gains they make from buying and selling shares.

Every investment trust has to publish an annual report and accounts that will spell out its investment strategy. That might involve aiming to generate income, specialising in a particular industry or focusing on a geographical area. The aim of the trust is usually found in its name; no prize for guessing what the Ivory Sime UK Smaller Companies trust invests in.

The best-performing trusts have done well for investors. According to Chase de Vere, the financial advisers, pounds 1,000 invested in the top-performing Murray Enterprise trust five years ago would now be worth pounds 4,621.72. That, of course, is no guarantee of what might happen in future.

Up to pounds 6,000 of an investment in most trusts can be placed in a personal equity plan, which means that any dividends or capital gains are tax-free. If the trust has more than 50 per cent of its assets invested outside the European Union, only pounds 1,500 can be sheltered in a PEP.

Many investment trusts also offer regular savings scheme, so you do not always need a lump sum to start.

By comparison with unit trusts, investment trusts have the advantage that they can put money into a wider spread of investments. These include companies whose shares are not publicly traded, property and even commodities. The charges levied by investment trusts are also generally lower.

Despite this, investment trusts are only suitable for more experienced investors, according to Graham Hooper of Chase de Vere. This is because investment trusts are complicated by the fact that their shares often trade at a discount to the value of their assets.

Shares in investment trusts are traded on the open market so their value is determined by supply and demand. The value of the underlying investments might stay the same or even increase, but the value of your shares will fall if few other people want to buy them off you. That could happen if, for example, the sector in which your trust invests becomes unpopular.

Discounts can be either totally irrelevant or vitally important. It all depends on whether the discount has narrowed or widened since you invested. The problem is uncertainty; you never know how much you will get until you sell. That puts a lot of people off.

Split-capital trusts are even more complicated, although they are becoming popular. These are specialised trusts that issue different classes of shares to attract different sorts of investors.

A split-capital trust has a finite life: when it is launched there is a specified date in the future when it will be wound up. On that day all of the value in the trust is distributed to the shareholders. But different groups of shareholders get a different slice.

Zero-dividend shares are particularly popular. These pay no dividends through the life of the trust but hand back a pre-set amount when the trust is wound up. This is called the redemption value. There is no guarantee that you will be paid the agreed amount, just that you and other zero- dividend shareholders will be paid first.

These are a few of the options, but be sure to take proper advice.

q The Association of Investment Trust Companies (0171 588 5347) produces a series of fact sheets for people interested in investment trusts and split capital trusts.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Simon Read: Frozen in time - the expat British pensioners who deserve a better deal

I had dinner with the pensions minister Steve Webb this week. There was a wide-ranging discussion about the new pensions freedoms starting in April, and changes to the state pension. Crucially, I also got to ask Mr Webb whether he had any plans to have another look at the injustice that is frozen pensions.

Number of serially under-performing investment funds has increased by a fifth, survey reveals

The new Spot the Dog survey shows that even famous fund managers, holding billions of pounds of our money, can make mistakes

Mark Dampier: We always bring down Britain. But there's plenty in the tank

While the health of the economy is not insignificant, Mark Dampier finds it incredibly unpredictable in terms of its impact on the stock market

If you haven’t switched supplier or tariff in the last 12 months then you could almost certainly save money by doing so

There are easier ways to save hundreds on your energy bills

A new free app is aimed at the three-fifths of Brits who have never switched supplier

Worse hit are loyal customers with long-standing accounts – their loyalty is rewarded with lower interest rates than more recently-launched accounts

Savers are being let down by banks and building societies, says Financial Conduct Authority

Regulator’s investigation into the market found that around £160bn was held in easy access savings accounts that pay interest lower or equal to BoE base rate

What to do if you're facing repossession: However far you fall, you're not on your own

Helen Fisher had to become a 24-hour carer, and then she faced repossession. But going to the right places for help changed everything, writes Simon Read

Simon Read: Information is power. And it's in the wrong hands when people are cold-called by companies that know they're in debt

In debt? You're likely to be targeted by unscrupulous companies that hope to profit from your misfortune. They may try to pretend to be your friend by offering what they call "help" – but almost certainly that help will come with a cost and leave you worse off than you were before they got in touch.

Mark Dampier: So you've got pension freedom... will it end up as a cold shower?

In less than three months' time radical changes to pensions will take effect, providing investors with more freedom. Yet for those who prefer to make their own investment decisions, the choice of funds available is overwhelming. And an income drawdown account is also not particularly easy to manage.

The move marks the culmination of a long campaign by debt charities and insolvency firms and follows a call for evidence launched by the Minister last August

Bankruptcy rules to change, Business Minister announces

The minimum amount for which you can be forced into bankruptcy is being raised from £750 to £5,000

Three-quarters of parents say being unable to afford to heat their home adequately is hitting the health of their children

Family well-being and health hit by heating costs

A shock report reveals that fuel poverty is affecting desperate families – and their children

Many people have no understanding of pensions

Are you ready for pensions reforms?

Most people are too confused to know how to use their pensions for a secure income

At a rate of 7.5 per cent, the wind is blowing behind ethical investors

A new initiative has financial and ethical virtues, says Simon Read
Ticket to cry: many passengers have been penalised with exorbitant and unnecessary rises

Simon Read: Inflation is riding the slow train. So why have we been given a one-way ticket to travel on the fares express?

I struck a chord with many of you when I wrote a piece earlier this week about rising train fares. It seems there is an army of travellers who feel they've been ripped off by increased transport costs.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Recruitment Genius: Web Developer - PHP

    £16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

    Day In a Page

    Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

    Greece elections

    In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
    Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

    Holocaust Memorial Day

    Nazi victims remembered as spectre of prejudice reappears over Europe
    Fortitude and the Arctic attraction: Our fascination with the last great wilderness

    Magnetic north

    The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
    Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

    Homeless Veterans appeal

    Homeless in Wales can find inspiration from Daniel’s story
    Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

    Front National family feud?

    Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
    Pot of gold: tasting the world’s most expensive tea

    Pot of gold

    Tasting the world’s most expensive tea
    10 best wildlife-watching experiences: From hen harriers to porpoises

    From hen harriers to porpoises: 10 best wildlife-watching experiences

    While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
    Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

    'I don’t want just to hold tackle bags, I want to be out there'

    Nick Easter targeting World Cup place after England recall
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore