How to buy investment trusts

These schemes allow investors to build up small amounts in a particular trust, or group of trusts managed by the same provider, on a regular monthly basis or via lump-sum investments. They are managed by investment trust management companies, or by an administrator appointed by the investment trust.

Investment trust schemes are recommended for people saving for a medium-term goal. The average amount held is £10,000 and the average holder age range is 45-55, according to F&C data. You can use them to build up pension supplements and house deposits and to save for expenses such as university, weddings and school fees.

They have also traditionally been used by parents and grandparents to save for children, although this is now becoming less popular as stretched household incomes have forced savers to focus on their own finances. The introduction of junior individual savings accounts (Jisas) in 2011 also provided another option for those wishing to save for children.

According to the AIC, the majority of investment trust savings schemes hold your shares on a nominee basis. This means the shares are held on your behalf by the registrar, which keeps the costs of ownership down, although it does restrict you in some other ways.

Pros

Investment trust savings schemes are a flexible way to invest and come with low charges. If you've got relatively small sums to invest these schemes will allow you to build a solid investment, as you can invest from as little as £20 a month or make a lump-sum investment from £250 - less than the minimum amount most platforms will allow you to invest in investment trusts.

The advantage of making regular investments, or 'drip-feeding', is that it helps avoid the potential volatility of the stock market by smoothing out the share price peaks and troughs - a process known as 'pound cost averaging'. This gives a lower risk profile and also saves you having to guess when is the best time to invest - a dangerous game according to most advisers.

Investment trust savings schemes have no maximum investment limits. There is also no limit on the number of schemes you can hold. For investors with more substantial sums to invest, the attraction of savings schemes lies in the charges, which tend to be lower than their open-ended counterparts.

Manager-sponsored investment company savings schemes often have no initial, annual or purchase charge because they are subsidised by the groups that manage them. However, investors will still have to pay stamp duty and dealing spreads, plus if you want to sell your holdings or transfer out, there will be a fee.

These schemes also allow you to reinvest dividends - a vital wealth-growing function - which not all stocks and shares Isas allow you to do, as Investors Chronicle reported last month. Isa provider AJ Bell doesn't offer the facility at all for investment trusts, while Hargreaves Lansdown won't let you reinvest dividends worth less than £200, causing a hassle for smaller investors. But with investment trust saving schemes, regular investors' dividend payments will be held and added to the next monthly contribution, while a lump-sum investor’s dividend payments will be held until they have a minimum sum suitable for investment.

A few investment trust savings schemes, for example SIT's Stockplan, offer share exchange schemes whereby existing holdings in most UK equities and gilts can be traded for shares in the investment trust savings scheme. It is also possible to buy shares as a gift for other people within such a scheme (either a child or an adult), although you will have to consider the tax implications of doing so, for both yourself and the recipient.

Investing in an investment trust savings scheme is relatively simple. Application packs can be obtained by telephoning or writing to the investment trust manager or downloaded from the relevant websites. Once you have read the key features of the scheme, along with the terms and conditions, you enclose a cheque and/or direct debt detail and send this to the scheme manager/administrator who takes care of the rest.

All investment trust schemes will send you a statement every six months detailing the number of shares you have and any charges levied. And if you decide you want to dispose of some or all of your shares, most schemes allow you to do so, which is a handy feature if you might need to get hold of your cash quickly. However, these arrangements vary between schemes and some do require written notice.

Investment trust saving schemes

Cons

Unlike individual savings account (Isa) wrappers you can get through fund supermarkets and platforms, there are no tax breaks with investment trust saving schemes (money in an Isa is exempt from capital gains and income tax). However, if you’re going to exceed your Isa limit for the year anyway, one option is to use your Isa for other investments, and keep your investment trusts in an investment trust saving scheme.

A downside is that you will usually be limited to the trusts on offer from one particular investment group. Another drawback of these schemes is they tend to deal lump sums monthly or weekly, lacking the immediacy of purchasing through a stockbroker. However, schemes have worked hard to improve this with some - Scottish Investment Trust and Witan Investment Services, for example - offering daily purchasing and real-time selling.

Annabel Brodie-Smith, communications director at the AIC, says: "More investors are using platforms rather than an individual savings plan, because it is easier for them to manage all their investments from one provider."

And there are downsides to regular investing, too. For example, if a trust is standing at a premium to its NAV, a lump-sum investor would probably choose to wait until the premium had narrowed or turned into a discount, but if you're drip-feeding, the saving continues and you end up buying more expensive shares.

Investment platforms

A growing number of investors are using investment platforms to buy investment trusts. Most now offer a wide range of trusts and allow you to hold them inside or outside an Isa wrapper, or in a self-invested personal pension if you’re investing for your retirement fund.

Dealing charges on one-off trades look high on some of the platform brokers – for example, you could pay up to £12.50 to buy an investment trust with Alliance Trust, or £17.50 with TD Direct. But most slash their rates considerably if you’re a regular investor. Alliance Trust, TD Direct and Sippdeal (for a limited range of trusts) only charge £1.50 a month to drip-feed money into investment trusts, which makes it much more cost effective - especially for smaller investors.

However, even if charges look low, there will also be stamp duty, bid-offer spreads and administration dealing fees (although Sippdeal and TD Direct don’t charge for administration, which will keep costs down).

And, finally, if you're not drawing income from your investment trusts, watch out for whether the platform you're eyeing up offers automatic dividend reinvestment - because not all of them do - and most charge extra for it. With Oeics and unit trusts this wouldn't cause any bother because investors have the option between 'Inc', which pays dividends out as income, and 'Acc', which automatically pays them back into the fund, so the money accumulates. But shares (including investment trusts) do not come with this option and are treated differently on platforms. Sippdeal's Isa doesn't allow automatic dividend reinvestment at all, while Fidelity offers the service at no extra cost.

Choice and flexibility is important - some savings schemes offer access to only a single trust (for example, Witan) while others (F&C) allow investors to diversify across a range of trusts (subject to minimum investment being met for each trust). Then there are schemes such as Alliance Trust Savings (ATS) that offer discounted dealing charges on trusts from across the market - in Alliance Trust's case, as long as you hold a minimum of 1,000 shares. ATS's open architecture allows investors access to a full range of investment trusts, open-ended investment funds and UK-listed shares.

Ease of dealing is important in assessing how practical the scheme will be to use and whether it will meet your needs. Can you buy and sell online or by phone or do you have to send instructions by letter? And is the frequency of dealing monthly, weekly or daily?

A list of several investment trust saving schemes in which you can hold some of our Top 100 Funds at low cost is provided in Wise up to investment trusts.

Platforms for investment trusts