What Is a Unit Trust (UT)?
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 is regarded as similar to a mutual fund in the United States.
- A fund manager directs the investments of a unit trust, and the investor is the beneficiary of the unit trust.
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, and the fund is split into units, which investors purchase. Unit trusts provide access to securities, mortgages, and cash equivalents.
Unit trust structures vary by region but are offered in 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 is the same as a mutual fund. In Canada, these investments are called income trusts.
Managing a Unit Trust
Fund managers direct the portfolio of unit trusts. Trustees are assigned to ensure that the fund manager runs the trust following the fund’s investment goals and objectives and are often fiduciaries protecting the best interest of the beneficiaries. Owners of unit trusts are called unit-holders, and they hold the rights to the trust’s assets. Registrars act as middlemen or liaisons for both parties.
How Unit Trusts Make Money
The underlying value of the assets in a unit trust portfolio is directly stated by the number of units issued multiplied by the price per unit minus transaction fees, management fees, and associated costs.
In a unit trust, the price of each unit is based on the fund's net asset value (NAV) divided by the number of units outstanding.
Unit trusts allow for new contributions and withdrawals to and from the pool. When money is added to the trust, more units are made to match the current unit buying price. When units are withdrawn, assets are sold to match the current unit selling price.
Fund managers make money through the difference between buying price, or offer price, and the selling price, or bid price. The difference between the offer price and the bid price is called the bid-offer spread and depends on the assets managed.
Advantages and Disadvantages of a Unit Trust
As in all investments, there are risks and benefits associated with a unit trust.
Pros
Managed by a financial professional
One unit includes investments in a diversified portfolio
No obligation or fixed investment term required
Cons
Performance of the trust depends on the fund manager
Management Fees
Principal investment is not guaranteed
How Do Unit Trusts Differ From Mutual Funds?
Mutual funds are investments made from pooled moneyfrom investors and can include bonds and equities. However, a unit trust differs from a mutual fund in that a unit trust is established under a trust deed, and the investor is effectively the beneficiary.
What Is the Risk of Investing in a Unit Trust?
A unit trust carries risk just like other investments. The unit value or income may decrease, and an investor's principal is not guaranteed.
How Do Investors Withdraw Money From a Unit Trust?
Investors can exit the fund by selling units at the bid price. To earn a profit, the bid price must be higher than the offer price initially paid for the unit.
The Bottom Line
A unit trust is an unincorporated mutual fund 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, with the investor as the beneficiary. Unit trusts often include diversified portfolios and are managed by a financial professional.
