What are Investments Trusts?
Investment Trusts refer to collective portfolios that pool money from investors to invest in securities, alternatives or derivatives. Typically, these funds are actively managed and consist of close-end funds with a fixed number of shares that trade at a premium or discount to the net asset value of the trust.
Investment Trusts can be leveraged products, meaning they have the ability to amplify both profits and losses based on the performance of the underlying asset. Leverage means that funds can be borrowed to control a larger position size than you could using your own capital.
For example, a 2X leveraged investment trust may seek to deliver twice the daily return of the underlying asset. However, leverage also increases the potential risk and can result in larger losses. These trusts don’t typically come in versions with e.g. 2X leverage, but are more often around 10-30%, if they are utilising leverage.
Investment trusts are mostly close-ended and have a fixed number of shares.
A fund’s KID (Key Information Document) holds basic information about the instrument, such as its investment objective, return, cost and other key characteristics.
What affects fund prices?
Fund prices can be influenced by several factors, including:
- Market conditions: Changes in overall market performance, economic indicators or investor sentiment can all impact fund prices.
- Asset performance: The value of the underlying securities, alternatives or derivatives held by the fund can affect its price.
For example, if a fund primarily invests in technology stocks, its price may rise if the technology sector performs well and may fall if there is negative news or a decline in the sector.
The issuer of the instrument typically calculates a price (NAV, or net asset value) which represents the value of all underlying instruments divided by the number of units in circulation. The market can then trade at a discount or premium, depending on the supply/demand of the instrument, however prices may not always be adjusted daily.
What are the risks when trading funds?
When trading funds, it’s important to be aware of the potential risks. These include:
- Market risk: The risk that a fund’s value will decrease due to broader market fluctuations.
- Liquidity risk: The risk that a fund holds illiquid assets that are difficult to sell quickly without impacting their prices. Funds may experience reduced liquidity both for the investor to trade and for the fund to trade the underlying securities. This can result in wider bid/ask spreads and difficulty in executing trades at desired prices, ultimately increasing the indirect cost for the investor.
- Other risks: Depending on the specific type of fund, there may be additional risks, such as currency risk, interest rate risk, credit risk or geopolitical risk.
- Psychological risks: Emotional decision-making and lack of discipline can lead to poor trading outcomes.
How much can you lose trading funds?
The maximum loss you face when trading funds is your full investment in the fund.
Additional costs/charges related to funds
When trading funds, you may incur additional costs or charges, which can vary based on the specific fund and its structure. Some potential costs/charges include:
Management fees: Fees charged by the fund manager for managing the fund.
Trading fees: Costs associated with executing trades, such as brokerage fees or exchange fees.
Administrative fees: Charges for administrative services related to the fund’s operation.
It’s important to be aware of the potential costs and charges associated with the specific fund you are trading.