Can Investment Trusts borrow?

Yes, they have the ability to borrow money which can be used to purchase shares. This is often referred to as 'gearing' as it has the effect of increasing the impact on the trust's net asset value of a rise or a fall in the value of the trust's investments. If any investments bought with loans rise in value by more than the cost of borrowing, the trust can pay back the money borrowed and retain the profit.

The risk is that, when the trust has to repay its borrowing and interest costs and the value of the investments is lower, the trust makes a loss. The more highly geared a trust is, (i.e. the more borrowings it has) the greater this impact will be. Not all trusts use gearing and, for those that do, the manager will only be able to borrow if the trust's board of directors agree.

THE SMALL PRINT

Past performance is no guide to future performance. Please remember that the value of an investment may fall as well as rise and an investor may not get back the full amount invested. Tax rules and regulations are subject to change.

To find out if Investment Trusts are suitable or for further details please contact us.