My son, who is currently a student, has saved some money in a cash Isa. I would like to give him £5,000 for his 21st birthday to invest in a stocks and shares Isa. I was wondering if an investment trust would be a good idea, where he could drip-feed the money over a year via a standing order. As I understand, investment trusts have lower fees and can often perform well over the longer term. I was wondering if one from the UK sector would be a good place to begin, such as Fidelity Special Values, or do you have any other suggestions?
The first question to ask is whether a stocks and shares Isa is the right choice for your son. If he might need to access this money within the next five years or so, then it might be more sensible to add money to his cash Isa.
An investment trust is just a wrapper, as is an Isa. What is important is that the underlying investments are appropriate for your son, based on his circumstances, requirements and attitude to risk.
There are some excellent investment trusts, although you need to appreciate that this structure is riskier than open-ended wrappers such as unit trusts. This is because the investment trust share price can differ from the value of underlying assets, depending on whether the trust is in demand or not.
Also, investment trusts can engage in gearing where they borrow extra money to invest. This is favourable when investment values are rising but compounds losses when they fall, and interest will also need to be paid on the amount borrowed.
The charges on investment trusts are often lower than on open-ended funds, although the gap between the two has narrowed considerably since commission payments were removed from funds.
You also need to consider that investment trusts often have fixed annual charges, whereas open-ended funds generally have only percentage annual charges, so some investment trusts can be quite expensive for investors putting in smaller amounts of money.
If you do select an investment trust, or an open-ended fund for that matter, and your son is willing to accept the risks of investing in shares, then you could consider a diversified Global Equity fund where risks are spread by investing in countries around the world.
Your son should be able to invest directly with your chosen investment trust provider. Alternatively, he can invest through a platform. However, while this is more flexible it will also incur an extra layer of charges.
Maybe look to use a platform when more fund choice is required but this isn't necessary if you're just investing in one investment trust or with one investment trust manager.