An investment trust is a way of investing that carries lower risk than unit trusts and several other forms of stock market investing. However, while deciding whether or not to invest in a trust fund may be a straightforward decision, it can become more confusing when picking the right investment trust for your budget and risk appetite.
So, how do you identify the right fund for your profile?
First, you have to ask yourself why you are investing in an investment trust. Is it for the purposes of diversifying your investments or are you basically looking for an investment vehicle that provides a consistent flow of income in your retirement?
Whichever the case, you will need to look at the characteristics of different funds against your goals to find out which one is best aligned to your plan.
On the basis of risk
This is one of the primary features that can be used to identify the right fund for you. Some investment trusts are composed of small-cap high growth stocks. A good example, in this case, is Janus Henderson Small Cap Growth Alpha ETF listed (JSML) on the Nasdaq, in the US.
This investment trust has more than doubled in value since bottoming in March and is now up 29% this year. Just like the name suggests, the trust fund focuses on small-cap stocks with high potential for growth. This also elevates the level of risk of the investment.
For those who prefer low-risk investment trust funds, then they can go for funds that invest in high-quality stocks. In this case, Janus Henderson Mortgage-Backed Security ETF (JMBS) is a good choice because it focuses on real estate assets. By definition, real estate is often considered an ideal investment for retirement investors. This fund has gained 4.88% since bottoming in March and is up 2.90% this year.
For those who prefer high-quality stocks from different industries, the City of London Investment Trust (CTY) can be a compelling choice. This fund focuses on large companies listed on the London stock exchange. The City of London Investment Trust share price is currently 2.90% above the estimated net asset value. The fund is up nearly 30% since bottoming in March but remains 18.7% down year-to-date.
On the basis of the time frame
Most investment trust funds focus on long-term investments, which basically means that they do not invest in stocks with a view of selling after a short period. This allows them to get through recessions and bull markets without running the risk of buying or selling at the wrong time.
However, some try to mix things a bit by introducing funds that invest in stocks with a view of selling after a short period. In most cases, such funds target event-driven bull-runs and companies affected by special situations and are likely to bounce back shortly after a restructuring program, or a takeover.
Janus Henderson Short Duration Income ETF (VNLA) focuses on risk and maximizing return on cash invested. The short duration also helps the fund to reduce the interest rate risk, which in turn boosts the bottom line.
Investors can also target investment trusts based on geography and sector. Some funds are created to focus on the technology sector while others have their portfolios dominated by defensive stocks like utilities and consumer goods.
Investment managers also create trusts that focus on regions like the Asia Pacific, Latin America, and the Middle East and Africa, etc, which can form part of their high growth portfolios.
There are also investment trusts that focus solely on government securities. These are considered to extremely low risk, which is why they are common with retirement investors.
In summary, different investors will have different reasons as to why they chose to invest in a given investment trust. However, it mostly comes down to two main features. Risk and the time frame.
If you can determine why you want to invest in an investment trust, then the process of choosing the specific funds to invest in becomes a little easier. At times, this may require more research and professional advice from a registered financial advisor.
Therefore, whether you go for riskier trust funds that offer high returns or a high-quality portfolio with modest risk and modest return, be sure to sure that the risk level is right for you.