A unit trust is a registered investment portfolio offering ownership opportunities to individual investors. This is similar to a mutual fund. In the United Kingdom, a unit trust is the equivalent of a mutual fund; however, in the United States, the Securities Exchange Commission notes key differences between these two structures. A unit trust is actually incorporated under a trust deed, and each investor is officially a beneficiary of the trust. This key difference is the force behind other features such as how profits are distributed and how shares are purchased.

Trust Deed

A trust deed is an official document that sets up a private entity which is subject to unique taxation and other requirements. Each trust has a beneficiary or multiple beneficiaries. The managers of the trust can determine when to add beneficiaries, when to change the investments the trust engages in, and when to distribute profits to beneficiaries. The beneficiaries in a trust retain the benefits of ownership but are not registered legal owners of the assets the trust holds.

Initial Investment

Once a unit trust is established, it can offer shares to investors. The investors will receive a report regarding the types of assets under management of the trust, which can include real estate, mortgages and other non-securitized investments. Most are chosen as income assets; this means they provide regular returns to the investors in the trust, but do not have large capital appreciation. A potential investor will take a look at the trust's portfolio, its management and its history prior to deciding whether to purchase shares in the trust. At any point, the trust can sell more shares, and the investor can sell their shares. This is called an "open-ended" fund, and it essentially means the investor's "stake" in the fund will constantly change. 

Asset Management

The success or failure of a unit trust is largely the responsibility of the trustees, or managers, of the trust. When profits are earned through solid investments, they are immediately paid out to investors. If a trust's manager changes their decision making or the trust obtains a new manager, investors should be wary of whether profits will remain consistent. 

Comparison to a Mutual Fund

There are several key points where a mutual fund and a unit trust vary, but they are also similar in structure.

  • Mutual fund profits may be reinvested into the fund. The investor would like the value of his or her funds in the share to increase. Profits may be paid out regularly through dividends, but some mutual funds do pay out their profits.
  • Open-end mutual funds are common. These funds constantly sell and buy back shares, giving their investors opportunities to cash out at different times. The same is true with a unit trust. When an investor wants to liquidate shares in a trust, it must place a sell order at a certain price. If this price is below what the trust is willing to pay, the transaction will occur, and the trust will re-purchase the shares. The difference between the sell order price and the actual price is called the "bid-offer spread."
blog comments powered by Disqus
Scottrade