A Breakdown of the Advantages and Disadvantages of a Unit Trust - Lawpath (2024)

Thinking of investing in a unit trust, but have no idea where to start? In the past, we covered the difference between a unit trust and discretionary trust. This article will instead cover the pros and cons of investing in a unit trust.

Unit trusts are great for growing wealth over time. They are not a get-rich-quick scheme. If you are looking to grow wealth sustainably, then a unit trust is a good way to go. However, unit trusts are not for everyone.
For a brief overview of what a trust is – click here.

Advantages

1. You do not have to be an expert on investing

You do not need any expertise to invest in a unit trust. The trust organisation and/or manager invests the trust’s funds in shares, bonds and other securities. The organisation and/or manager is an investor specialist, who has the know-how for investing smartly. All you need to do is provide the money.

2. Diversification

Diversification is a fancy way of saying that your money will be spread out across multiple investments. This protects you from shock losses and increases your chance for making profits. Sure, you may not hit-the-jackpot with one investment, but diversifying almost guarantees gradual growth.

3. Limited Liability

Similarly to being a shareholder in a company, as a unit trust holder, you are not liable for any trust mismanagement. You may lose money if the trust is mismanaged, but that is all. All responsibility falls with the trust manager. The manager is in a position of trust and has various duties to fulfil. He/she will be held personally responsible for not acting in the unit holder’s best interests. This protects your money from greedy and fraudulent behaviour.

Disadvantages

1. Fees

Not only will you pay for trust units, but you must also pay fees for running the trust. These fees include:

• Trustee – the person or company running trust needs compensation;
• Redemption Fee–You pay a percentage of your investment when selling or claiming units;
• Initial Sales Charge– You pay a percentage of investment when buying units.

2. Tax

If trust assets are sold at a loss that loss usually stays within the trust. You cannot offset asset losses against other streams of taxable income. However, the trust may be set up, so that the unitholders can take the asset losses.

For more information on your tax responsibilities as a unitholder contact a tax lawyer.

Is a Unit Trust Right for Me?

You will not make a fortune overnight, but you may make a steady gain over time. Unit trusts are a relatively safe investment. However, there are other safe investments to consider. These are in the form of others trusts, such as discretionary and family trusts; schemes, such as mutual funds or perhaps even a long term deposit.

Also, depending on your circ*mstances, perhaps a trust is not right for you. For example, you may be looking for more control over what assets to invest in or wish for more flexibility in changing assets over time.

To discuss your options and see if a unit trust is right for you, contact a company lawyer.

What to know more about investing in a unit trust? Contact a LawPath consultant on 1800 529 728 to learn more about unit trusts and obtaining a fixed-fee quote from Australia’s largest legal marketplace.