What is a Unit Trust?

M. McGee
M. McGee
Man climbing a rope
Man climbing a rope

A unit trust is a type of trust agreement used in the United Kingdom and in some former and current British holdings. The basic method of a unit trust is quite simple; several people give a single individual their money and that person invests the money in a wide range of securities. The profit generated by the entire portfolio is handed out to investors based on the amount of money they initially invested. For instance, if one person invested 20% of the total initial investment, then that person is entitled to 20% of the profits from the investment.

The term “unit trust” may be common in a select group of countries, but many locations have arrangements very similar or identical to a unit trust. In most places, these investments are called mutual or investment funds. In the United States, these investments are generally called mutual funds, but the actual laws surrounding them are different from many other countries. A basic “trust” system is quite common in most countries and covers a wide range of investment and accounting types.

A typical unit trust is spread out among five groups of people. The fund manager handles the actual investments. This position is typically part of a brokerage agreement, and the manager makes money based on the number of investment decisions made. Trustees monitor this position. A trustee watches the investments made by the fund manager and ensures they are all made for the betterment of the unit trust.

Unitholders provide the money for the securities and are the primary beneficiaries of the investment. A registrar acts as the middleman between the fund manager and the unitholders, facilitating communication between the people with the money and the people that invest the money. Finally, distributors advertise the unit trust and find new investors for the fund.

In most cases, a unit trust is seen as a long-term investment. Since it has such an open-ended term, these are often used as one of two things inside an investment portfolio. As the fund will typically provide a small, but very steady and stable profit, it will often double as a retirement system for the unitholders. In these cases, it isn’t uncommon for the unitholders to have little information as to where their money is and how it is used. This falls under the purview of the company they work for, often the fund’s sole distributor.

Other investors see it is as the stable part of a larger portfolio. It is important for most investors to maintain a wide range of investments. Steady investments, like those in a unit trust, offset losses from riskier investments. While the risky investment has the potential to make a lot of money quickly, it can also lose money just as fast. The unit trust makes relatively little money, but it is usually extremely consistent.

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