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Understanding How Unit Trusts (UTs) Work

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A unit trust is an investment, usually good for beginning investors, that is similar to, but not the same as a mutual fund. Unit trusts pass profits directly to investors instead of reinvesting them in the fund. A unit trust shouldn’t be confused with a unit investment trust although the two are very similar. A unit trust is usually found in Great Britain and other foreign countries, while a unit investment trust is found in the U.S. Here’s a breakdown of how unit trusts work and make money for the investor.

Investing can get complicated, but working with a financial advisor is one of the best ways to clarify and even simplify the challenge.

What Is a Unit Trust?

A unit trust is generally thought to be an investment that is good for beginning investors. Unit trusts are similar to mutual funds and exchange-traded funds (ETFs). They are a portfolio of assets, like stocks, bonds, real estate and alternative investments. The trust is then subdivided into “units” with each unit similar to a share when investing in a mutual fund. Investors then buy the units of the unit trust up to the amount they want to invest.

Unit trusts are professionally and actively managed. The legal owner is the trustee, who owns the underlying assets. The investors who buy the units are called the beneficiaries or unitholders. A unit trust is effectively an unincorporated mutual fund where the trustees hold the assets and all profits go back to the investors rather than putting them back into the fund.

A unit trust is different than a mutual fund in another way. It is a trust set up under a trust deed. A trust deed establishes the investor as the beneficiary of the trust, but the money and yields on the investments are not particularly liquid since the trustee does not distribute money earned on the trust on demand.

Unit investment trusts in the U.S. work much the same way, but there are a few differences. They are closed-end, passively managed and they have a termination date.

How Unit Trusts Work

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The trustee, a shelf company, is set up to act for the unit trust. Unitholders appoint the trustee and their powers are established in the trust deed. Trustees are usually fiduciaries, which means that they are supposed to guard the fund’s interests and that the welfare of the unitholders. Unitholders have the rights to the income and capital of the unit trust. A unit is a piece of property that entitles the unitholders to those rights. The percentage of capital and income the unitholder is entitled to is fixed at the conception of the fund when units are issued. Since the rights to the unit are a form of property and they have a value, they can be bought and sold.

Shares are different than units because they do not grant the shareholder any right to the funds’ underlying assets. The unitholder has a proprietary interest in the property of the trust. Between the trustee and the unitholders are the fund managers who operate the firm for profit.

How Unit Trusts Make Money

Unit trusts are open-ended which means investors can make continued contributions to it as well as withdrawals from it. When new contributions are made, more units are created and when they are sold, then units are subtracted.

The profit the fund managers make is the difference between the offer price or price when the unit was bought and the bid price or price when it was sold. Unitholders do have to pay taxes on dividends, interest and capital gains.

Bottom Line

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Unit trusts, even though they have fallen somewhat out of fashion, still serve a purpose. They are professionally managed, reasonably priced investments for beginning investors. They are somewhat different than unit investment trusts in the U.S. Profits for the trust are the bid-offer spreads when a unit is sold. Taxpayers have to pay taxes under the tax laws of their host country.

Tips for Investing

  • If you’d like help figuring out if a unit trust is a good idea for your investments, check with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Would you like an estimate of the value of an investment sometime in the future? SmartAsset’s investment calculator can provide you with one.

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