Unit trust

Page written by AI. Reviewed internally on June 25, 2024.


A unit trust, also known as a mutual fund in some regions, is a collective investment scheme where investors pool their money together to invest in a diversified portfolio of assets, such as stocks, bonds, or other securities.

What is a unit trust?

The fund is managed by a professional fund manager or investment company. Here are some key points about unit trusts:

1. Collective investment:
– A unit trust pools together funds from multiple investors to create a larger investment pool. This allows individuals to access a diversified portfolio that they might not be able to afford on their own.

2. Diversification:
– Unit trusts invest in a wide range of assets, which helps spread risk. This diversification reduces the impact of poor performance by any single investment.

3. Professional management:
– A dedicated fund manager or team of managers makes investment decisions on behalf of the investors. They conduct research, make asset allocations, and manage the portfolio to achieve the fund’s objectives.

4. Liquidity:
– Investors can typically buy or sell units (shares) in the fund on any business day. This provides liquidity and flexibility in managing investments.

5. Unitisation:
– The fund’s assets are divided into units, and investors purchase these units. The value of a unit is determined by the total value of the fund’s assets divided by the total number of units outstanding.

6. Income distribution:
– Unit trusts often distribute income earned from the underlying investments to unit holders, usually in the form of dividends or interest payments.

7. Capital gains:
– When the fund’s investments increase in value, the capital gains are reflected in the unit price. Investors can benefit from these capital gains when they sell their units.

8. Risk and return:
– Different unit trusts have varying risk profiles based on their investment objectives. Some funds may focus on capital growth and carry higher risk, while others may prioritise income generation with lower risk.

9. Regulation and oversight:
– Unit trusts are subject to regulatory oversight to protect the interests of investors. They are often required to disclose information about their holdings, strategies, and performance.

10. Types of unit trusts:
– There are various types of unit trusts, including equity funds (focused on stocks), bond funds (investing in fixed-income securities), balanced funds (mix of stocks and bonds), and specialty funds (targeting specific sectors or asset classes).

11. Entry and exit costs:
– Investors may incur fees when buying or selling units, including front-end loads (charged at purchase) and back-end loads (charged at redemption). Some funds may also have annual management fees.

12. Tax considerations:
– Tax implications vary by jurisdiction and may affect the net returns to investors. For example, some gains may be subject to capital gains tax.

Overall, unit trusts provide a convenient way for individual investors to access professional investment management and diversify their portfolios. They are a popular investment choice for those seeking exposure to a broad range of assets while benefiting from expert oversight.

Example of a unit trust

ABC Investment Management offers a unit trust called the “Global Equity Fund.” Investors who want to diversify their investment across global stock markets can invest in this unit trust.

  1. Fund objective: The Global Equity Fund aims to achieve long-term capital growth by investing primarily in a diversified portfolio of global equities.
  2. Fund structure: Investors interested in the Global Equity Fund can purchase units of the fund through ABC Investment Management.
  3. Professional management: ABC Investment Management employs experienced fund managers who are responsible for selecting and managing the portfolio of global equities within the fund.
  4. Diversification: The Global Equity Fund invests in a wide range of global equities across different sectors, industries, and geographic regions.
  5. Accessibility: The Global Equity Fund offers investors the opportunity to access global equity markets with relatively small investment amounts. Investors can purchase units of the fund through various channels.

In this example, the Global Equity Fund offered by ABC Investment Management provides investors with a convenient and professionally managed vehicle to access global equity markets and achieve long-term investment objectives.

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