Unit Trust - Explained
What is a Unit Trust?
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Table of ContentsWhat is a Unit Trust?How Does a Unit Trust Work?How Unit Trusts OperateHow Unit Trusts Make Money
What is a Unit Trust?
A Unit Trust is a type of managed fund where investors' funds are pooled and invested in assets that provide profits for the investors. A unit trust is a form of mutual fund, in which the collective investment is formed under a trust deed. The funds pooled from investors are invested in assets that generate profit, the profits realized are dispersed to individual unit owners, the profits are not reinvested into the fund.
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How Does a Unit Trust Work?
A unit trust is managed by a professional fund manager or an investment company. The return on investments or profits that will be realized depends on the skills of the managers that is in charge of the fund. Usually, unit trusts invest in financial assets that generate profit such as securities, mortgages, properties and other financial instruments. The specific objective of unit trusts is to provide profits for investors. Unit trusts are constituted under a trust deed. In the United Kingdom, unit trusts are also called 'mutual funds'. Examples of countries where unit trusts are operated include; Ireland, Canada, Fiji, U.K, New Zealand, Singapore, Kenya, Australia and South Africa. Here are some key points you should know about unit trusts;
- Unit trusts are managed funds pooled from investors, they are known as unincorporated mutual funds.
- Profits generated by unit trusts are not reinvested, they are distributed to individual unit owners of the trust.
- Unit trusts are constituted under a trust deed.
- The trust's beneficiary is the investor.
- Across countries and regions, distinct definitions are given to unit trust. In the U.K for instance, unit trusts are also 'mutual funds'.
How Unit Trusts Operate
A unit trust's portfolio is a diversified portfolio that comprises of a range of assets. The value of the assets in the portfolio are revealed through the number of issued units multiplied by the price per unit. A unit trust is often managed by a professional fund manager in exchange for a fee. The management fee, transaction fee and other expenses are deducted when calculating the underlying value of assets in the portfolio. Every unit trust has an objective which inform the management goals of the fund manager. In most cases, making a profit is the ultimate goal of unit trusts. Owners of units trusts are called unit holders, they are stakeholders in the trust.
How Unit Trusts Make Money
There are different ways fund managers make money for unit trusts. Aside from investing in financial assets that generate profits, there are other techniques. Unit trusts are open-ended, they have different units with different prices, also, additional units can be added to the trust. A major way through which fund managers make money is from the bid-offer spread which is the difference between the offer price and the bid price. The offer price is the price that the unit if purchased and the bid price is the price it is sold.