LESSON 1 Unit Trust In Brief

A unit trust is a financial vehicle through which individuals may invest their money. The idea behind unit trust is better returns through collective investing. In other words, it means pooling the investments of many investors, individuals and institutions, to invest according to the stated investment objectives and strategy.

Investing in a unit trust offers investors numerous advantages, including:
a.    Professional management at a low cost
b.    Safety through the spreading of risk (diversification)
c.    Liquidity
d.    Ease of transaction
e.    Capital appreciation/income stream

The operation of a unit trust may be best explained by outlining its similarities with the operation of a bank. Many individuals deposit money in the banks, for which they receive interest. These individuals expect complete liquidity where they are able to withdraw their deposits in cash at any time. The banks employ professional managers to look after the deposits, which are invested. These managers lend the deposits to other individuals requiring funds and a host of other profit generating facilities of the banks.

Similarly, unit trust holders wish to put their money to generate higher returns. The goal of all investments is to make money work harder, either through producing income or growth. Unit trust holders have liquidity because their units can be readily converted into cash at any time. By investing in unit trusts, it allows them to engage professional fund management companies at a low cost to the individual investors. These management companies diversify the investible funds in many different securities and other approved channels to spread the risk.

The unit trust is constituted through a document known as a Deed which brings together and binds the various parties to the deed:

• The trustee, who holds the assets of the trusts on behalf of the unitholders.
• The management company, who is the promoter of the scheme and provides investment and administrative expertise as well as markets units to the public.
• The unitholders who provide the funds for investment and expect to receive the benefits derived from the investment. The effect of dividing the beneficiaries' interest in the trust into units is that their interest is quantified into discrete portions.

Particular advantages of unit trusts over the pooled investments include:

• The provision of an independent trustee to hold the trust's assets on behalf of unitholders and to watch over their interests on an on-going basis.
• The deed and prospectus are scrutinised by government authorities, prior to an offer of units being made to the general public. The management companies and trustee are themselves approved by the regulators.
• A buy back provision or covenant in each deed which requires the management company to redeem an investor's units within a specified time limit at a price determined in accordance with the deed.
• Provisions in the deed under which the management company and trustee are in a fiduciary position in relation to the trust (i.e. they can only profit in ways laid down under the deed). The investor can determine in advance what costs and charges they will be required to pay to join and stay in the trust.