How To Invest In Trusts: Tips And Advice

How do investment trusts compare to other types of investing?

One of the many ways to build a portfolio is to find an appropriate financial or investment trust that will allow you both to maximize your returns and to safeguard your investment. As with any investment, this is always the balance that you must find.

An investment trust, often called a Unit Trust or a Unit Investment Trust, falls between the two methods people usually use to invest. On one hand, you can find the right stock or bond, invest your money, watch it carefully and hope you made the best choices. If you're good at your research and the markets act as you expect, you can do fairly well this way.

On the other hand, you can select a stock or bond mutual fund, invest your money there, watch it carefully, and again hope you did well. The obvious advantage of the mutual fund is that your investment is spread over often hundreds of stocks and/or bonds, and your risk is thus spread as well.



An investment trust has the best - or worst - of both these methods. It selects more than one stock or bond to invest in - sometimes up to twenty or thirty. In this way your risk is still spread over a number of investments. But, because of the much smaller number of stocks or bonds, a couple of bad apples can make quite a difference.

There are other pitfalls you need to be aware of with investment trusts. They are often financial products of specific brokerage firms and not traded on the open market like the stocks or bonds within them. If you want to sell in a hurry, you might not be able to. Ask you broker for details.

Another connected problem with these trusts is that you buy them for specific periods of time - one year, two years, twenty years, etc. If your trust is breaking all records and the one year time frame has expired, your trust is expired, you pay your capital gains if the investment is not in a tax deferred account, and you start all over again. Obviously the opposite is also true - if you picked poorly, you'll be kicking yourself for quite some time.

Trusts are often closely tied to specific sections of the economy - high technology, health care, transportation, for example. When making a decision where to invest, you need to do your homework on the area of the economy in which you are interested. Even in a down market for any specific sector, you can find a winner. With a trust, however, you are more closely tied to the sector itself without having the protection of broad diversification you get with a mutual fund.

Financial packages such as investment trusts are additional vehicles you can consider to see if they give you the returns you want and the potential risks you can live with. These packages are also vehicles for brokers to find another way to sell you something. It has to be your decision where you are going to invest your money. You need to consider all the potential for both good and bad. What's the timeline of the trust - is it too long or too short? What are the tax implications of an expired trust if you held it for years and are hit with a big capital gains payment at the end? Is this the financial or economic sector for you? What will happen if you need the money in a hurry? Is it a growth or income fund?

If done wisely, these trusts can do well for an investor. Like any other investment, they can also make your money disappear before your eyes. Do your homework (with the help of a broker, if you have one), take your time, and make your own decisions. This is the best way.

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