A unit trust is an unincorporated mutual fund structure that holds assets and provides profits to individual unit owners instead of reinvesting into the fund. A unit trust is established under a trust deed, and the investor is the beneficiary.
Key Takeaways
- Unit trusts are unincorporated mutual funds that pass profits directly to investors rather than reinvest in the fund.
- In the United Kingdom, a unit trust mirrors mutual fund operations common in the United States.
- A fund manager directs the investments of a unit trust, and the investor is the beneficiary.
Understanding Unit Trusts (UTs)
A unit trust is a collective investment packaged under a trust deed. The fund manager may invest in bonds or shares on the stock market, distributing investments into units which investors can purchase. Unit trusts provide access to a variety of securities, mortgages, and cash equivalents.
Unit trust structures vary globally but prevalent in places like Guernsey, Jersey, Fiji, Ireland, New Zealand, Australia, Canada, Namibia, Kenya, Singapore, South Africa, the U.K., the Isle of Man, and Malaysia. In Asia, a unit trust functions similarly to a mutual fund. In Canada, these investments are often referred to as income trusts.
Managing a Unit Trust
Fund managers direct the portfolio of unit trusts, with trustees ensuring that the fund manager runs the trust per the fund’s investment goals and objectives. Trustees act as fiduciaries protecting the best interest of the beneficiaries. Owners of unit trusts are known as unit-holders and are entitled to the trust’s assets. Registrars play intermediary roles between these core parties.
How Unit Trusts Make Money
The underlying value of assets in a unit trust portfolio is calculated by the number of units issued multiplied by the price per unit, minus transaction fees, management fees, and associated costs.
In a unit trust, unit prices are based on the fund’s net asset value (NAV) divided by the number of units outstanding. Contributions and withdrawals are flexible; new money leads to more units being created, while withdrawals involve selling assets corresponding to current unit prices.
Fund managers earn through the spread between the buying price (offer price) and the selling price (bid price). This difference, known as the bid-offer spread, varies depending on the managed assets.
Advantages and Disadvantages of a Unit Trust
Pros
- Professionally managed by financial experts.
- Diversified portfolio investments within one unit.
- No obligation or fixed investment term required.
Cons
- Performance dependent on the fund manager.
- Management Fees.
- Principal investment not guaranteed.
How Do Unit Trusts Differ From Mutual Funds?
Both mutual funds and unit trusts represent pooled investments in bonds and equities. However, unit trusts are governed by a trust deed, with the investor obligated as the beneficiary. This differentiation affects how profits and management are handled.
What Is the Risk of Investing in a Unit Trust?
Investing in a unit trust does carry inherent risks. The value or income of the units may decrease, and an investor’s principal is not guaranteed. Market conditions and managerial proficiency influence these risks.
How Do Investors Withdraw Money From a Unit Trust?
Investors can exit the fund by selling their units at the current bid price. To realize profits, the bid price must be higher than the initial offer price paid for the units.
The Bottom Line
Unit trusts are an attractive unincorporated mutual fund option that offers direct profit to unit holders without reinvestment. Operating under a trust deed with a multifaceted portfolio, they are a solid choice helmed by professional fund managers.
Related Terms: mutual fund, trust deed, beneficiary, net asset value.
References
- Lloyds Bank. “What Is a Unit Trust?”
