A unit trust is an investment that’s usually good for beginning investors. It’s 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 is not to 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 can help you to clarify and even simplify the challenge.
What Is a Unit Trust?
A unit trust is often considered a good investment for beginners.
Similar to mutual funds and exchange-traded funds (ETFs), a unit trust comprises a portfolio of assets such as stocks, bonds, real estate and alternative investments. These assets are divided into “units,” which function like shares in a mutual fund. Investors purchase these units based on the amount they wish to invest.
Unit trusts are professionally and actively managed, with a trustee serving as the legal owner of the underlying assets. The investors, known as beneficiaries or unitholders, receive the trust’s profits directly, as unit trusts do not reinvest earnings back into the fund. Essentially, a unit trust operates as an unincorporated mutual fund, where trustees hold the assets and distribute profits to investors.
One key distinction between unit trusts and mutual funds lies in their structure. A unit trust is established under a trust deed, which designates the investor as the trust’s beneficiary. However, unlike mutual funds, the assets and returns in a unit trust are not highly liquid, as the trustee does not distribute earnings on demand.
In the United States, unit investment trusts function similarly, but with notable differences. UITs are closed-end, passively managed, and have a predetermined termination date.
How Unit Trusts Work
The trustee, often a shelf company, is established to represent the unit trust. Unitholders appoint the trustee, whose responsibilities and powers are defined in the trust deed. Trustees are typically fiduciaries, meaning they are legally obligated to act in the best interests of the fund and prioritize the welfare of the unitholders.
Unitholders hold rights to both the income and capital of the unit trust. Each unit represents a portion of ownership, granting unitholders these rights. The percentage of income and capital each unitholder is entitled to is determined when the fund is created and the units are issued. Since units represent a form of property with monetary value, they can be bought and sold.
Shares differ from units because they don’t provide shareholders with rights to the underlying assets of the fund. Conversely, unitholders have a proprietary interest in the trust’s property. Positioned between the trustee and unitholders are the fund managers, who oversee and operate the trust with the goal of generating 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. Then, when they’re 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.
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Frequently Asked Questions
How Are Unit Trusts Different from Mutual Funds?
Mutual funds are investment vehicles that pool money from multiple investors to invest in a range of assets, such as equities and bonds. Unit trusts, on the other hand, operate under a trust deed, where the investor holds the role of a beneficiary within the trust structure.
What Are the Benefits Associated with Investing in a Unit Trust?
Investing in a unit trust offers several advantages, including professional management, diversification, accessibility, affordability and liquidity.
What Are the Risks Associated with Investing in a Unit Trust?
Like any investment, unit trusts come with inherent risks. The value of the units and the income they generate can fluctuate, meaning there is no guarantee of preserving the investor’s initial principal.
Bottom Line
Unit trusts, though not as popular as they once were, still hold value as an investment option. These professionally managed and reasonably priced vehicles are particularly well-suited for novice investors. Unlike unit investment trusts commonly found in the U.S., unit trusts operate with some distinctions. The trust generates profits through bid-offer spreads when units are sold. Investors should be mindful that any earnings are subject to taxation in accordance with the tax laws of their respective country of residence.
Tips for Investing
- If you’d like help figuring out if a unit trust is a good idea for your investments, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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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