Everything you Need to Know about Unit Trusts: A Beginners Guide


Being a billionaire investor means you need to navigate the stock market and all the forms of investments on your own this means that along your journey you are going to make a few mistakes but hopefully we can help you along your way that brings us to everything you need to know about unit trusts.

A simple way of describing a unit trust is to say that: It is an organisation that has a fund manager do all of its investing and selling of shares and all assets investors invest their money into the trust and exchange for units and those units scale in value according to the value of the unit trust.

There is a lot we need to unpack in this article we will start off by talking about 7 things you need to know about unit trusts then we will move on to some of the advantages and disadvantages of investing in unit trusts so for everything you need to know, keep reading.

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7 Things You Should Know About Unit Trusts

When it comes to unit trusts, there is a lot that you need to know. So, I thought I would make a list highlighting the most important things to know about this investment option.

In this list, I will try to be as thorough as I can regarding the topics that I have chosen to cover. So, let’s get into it. Here are 7 things you should know about unit trusts.

#1. What Are Unit Trusts?

People tend to get carried away when explaining what a unit trust is and it is hard to find an answer that is easy to understand 

A unit trust is similar to a mutual fund. It consists of a wide variety of investments. These investments can range from shares, bonds, properties, and mortgages. 

The trust will also have a fund manager and most of the time it is not an individual. The fund manager is a company that has an entire team working on the trust at all times. This just adds to the efficiency and safety of a unit trust. In order for a company to qualify to manage the fund of a unit trust, they go through some vigorous steps and heavy vetting processes.

Then you have the investors, you are potentially one of them. All the money that is put into the trust by investors is pooled together. The fund manager will then do most of the investing and selling.

The fund manager will break all of the assets within the unit trust into units. Those units will have a price relative to the value of the trust. If you invest in a unit trust, you will basically be buying units and not shares. That is a very important thing to remember and we will get into that later on.

#2. How Do Unit Trusts Work?

Each unit within the trust will have a set price depending on the value of the assets within the trust. You will buy a certain amount of units however, the trust will keep a few of those units.

When you decide to sell your units, the trust will keep some of them as profit. That sounds like a bad deal right? Well, not really.

The goal of a unit trust, or should I say of the fund manager, will be to increase the value of the trust.

You also get paid out depending on the stipulations of the unit trust. So, all the profits accumulate over a month, three months, or even over 6 months. When the time comes to receive your profit, you will be paid out according to the value of your units.

Some unit trusts also pay any interest that is due to you.

In order to ensure that the fund manager is carrying out the goals and objectives of the trust, a few trustees will be assigned to watch over all of this. While they usually won’t interfere with the fund manager, there are some cases where they will. This is mainly if the fund manager starts to raise a few eyebrows with his practices.

#3. Is a Unit Trust Good Investment?

Yes, this is definitely something that you should know, a unit trust is a good investment. Let’s get into it.

Setting up a unit trust is not an easy task. The people involved, especially at the highest levels of any given unit trust, are highly qualified. They also know what they are doing. As we mentioned when speaking about the fund manager, They have large teams. These people are also highly qualified.

Because they are dealing with a pool of money and with all the investments they make, unit trusts are one of the safest ways of investing that there is.

When speaking about unit trusts, a lot of beginner investors tend to become very skeptical when they hear that most of the investing and selling of assets are not in their control. They tend to get negative opinions or negative misconceptions.

If this happened to you while reading this article, it is important to remember that a unit trust will often depend on its reputation and its ability to turn people’s investment into profits for them.

They stand to make a lot more money by delivering on that promise and also by making a profit for their investors.

So, if you find a unit trust that you like, you can do your research on them and if you invest in a reputable unit trust, you can have peace of mind that you have the best in the business doing their thing to make you profits. Remember, if they are making profits for you and everybody else that has invested with them, they are also making a lot of profit.

#4. Can You Lose Money In Unit Trusts?

You could lose your money simply by dropping your cash on the floor. Although that is true, I am kind of joking but unfortunately, with the stock market whether you are investing in stocks, companies, or in a unit trust, there is always a possibility that you could lose money.

Overall, you could lose money but a good fund manager will be able to spot a lot of the warning signs that most people miss. They will be able to get out of an asset such as a share before the trust loses too much money.

I always like talking about diversifying your portfolio and that is what a unit trust is. It is basically a massive portfolio with large amounts of money that is invested in a lot of different assets.

Because the portfolio is so diverse and mixed across a lot of different asset classes, it is unlikely everything will go to zero.

So, if one share starts to tank, the fund manager will simply get out of it as quickly as possible and most of the time, the profits from all the other assets that the trust has will cancel out the losses.

What I am trying to say is that it is very rare for a reputable unit trust to lose money.

#5. Investing In Unit Trusts Is Not The Same As Shares

The last thing I would want is for you to get into unit trusts with misconceptions that could cause you to have a bad experience from the start. That doesn’t necessarily mean that you will lose money, a bad experience could also be in the form of you not understanding the terms of a unit trust.

When you invest in a unit trust, your money gets pooled in with all the other money from other investors. You are basically only purchasing units. You will not own any of the shares, properties, or any assets that the unit trust has.

You simply own units within that trust, these units can increase in value as the value of the trust increases. This is called “capital gain”. With that being said, different trusts have different stipulations. So, it is best that you do as much research as possible before investing in a specific unit trust.

However, the gains made through Unit Trusts are still liable for income tax & capital gains. A tax free option is something like an ISA or a Roth IRA.

#6. Unit Trust are Long Term Investment

When it comes to unit trusts, we have already mentioned that there is a possibility that you could lose money. However, it may be rare but it is still something that you need to take into consideration.

With that being said, a unit trust has its funds spread throughout multiple industries, sectors, assets, and markets. This means that they can’t always win but as we have mentioned, profits from winning assets are normally greater than losses from losing investments.

The longer that you stay invested with a unit trust, the more chance you have of seeing substantial returns. These returns can be in the form of payouts, interest, or even when the day comes that you decide to pull out of the unit trust.

#7. Unit Trusts Are Regulated

If you are looking for further peace of mind, this section is for you. Most countries regulate unit trusts that operate within their borders.

These regulations are designed to protect investors and in some cases, to protect the trust.

Each country has its own set of regulations that get set out by conduct authorities. Because we have readers from all over the world, it is best that you check to see the regulations of your country and who implements those regulations.

When is a Unit Trust Right for You?

Have a look at these points, and if they relate to your situation a Unit Trust might be the best investment for you:

  • You want to invest in lots of different assets but don’t have the time, or expertise to know what to go for.
  • You want to invest in long term in a diverse portfolio but don’t have the money to do so yet.
  • You understand that investing is risky, and are happy to pass the responsibility to someone else.
  • You can invest at least $25/£25 per month or have $500/£500 to invest right now.

Unit trusts are a great way to get into the market for someone that doesn’t have huge lumps of cash to invest with. However, if you don’t understand the investment or product you choose, you should seek financial advice before you buy.

Main Advantages Of Unit Trusts

There are a lot of advantages when it comes to investing in unit trusts however, in this article, I will focus on a few of my favorites.

A successful investor will spend a lot of this time weighing up the pros and cons of each investment and I think it is important that beginner investors start out with this mentality.

Keep your Money Liquid

With some investments, you might struggle to sell your shares, property, or any other assets. Therefore, while you can consider yourself liquid by owning shares, you don’t have access to that money as soon as you want.

Unit trusts are a bit different. You can pretty much sell your units whenever you want and therefore, investing in a unit trust is one of the most efficient ways to keep yourself liquid.

Safety

As we have mentioned, only the most qualified companies or sometimes individuals can act as fund managers for unit trusts. Then they have to answer to the trustees. The trustees can be a set of individuals or an organization. These trustees are tasked with making sure the objectives of the trust are being met.

Everything is scrutinized and the trustees make sure that the fund managers are doing the job that they are appointed to do.

Then you have regulations that are set by regulators within a country. These regulations are designed to create a fair investing environment. They also make sure that the trust follows certain rules.

Finally, we have already discussed this but a unit trust has an extremely diverse portfolio and so you have that safety net as well. It isn’t just about them having a diverse portfolio, it is a portfolio that is built by some of the most intelligent minds in the financial industry.

Hands Off

Some might say this is a disadvantage while others love being hands-off with their investments. A unit trust is extremely hands-off, all you need to do is put your trust in the fund manager who most of the time will help you see profits and good capital gains.

Even though these are hands-off, you should still keep up to date with the markets. Also, hopefully, a unit trust will only make up a portion of your portfolio.

Disadvantages Of A Unit Trust

As with most things, unit trusts do have their disadvantages and we are going to take a look at that in this section. Let’s get into it.

Safety Over High Reward

Most unit trusts don’t offer high rewards. In fact, you could see higher short-term rewards by investing in a diverse portfolio on your own.

I just want you to ask yourself a quick question regarding my previous statement, do you trust yourself more than you trust the best in the business?

Unit trusts are a long-term investment and that is the only mentality you should have when you walk into it.

Out Of Your Hands

As we said in the advantages section, some people see this as a good thing but you might see it as a bad thing. 

You have no control over what the fund manager does with the money you have invested.

Unfortunately, by handing your money over to someone who is going to manage it, means you pay fees. In most cases, you will pay:

  • An initial charge for buying the units, which is usually around 2% of your investment amount.
  • Bid-Offer prices. Just like other investments, you will have to pay a quoted price which can be higher than the asset trades for.
  • On-going management charges, this is way the fund and its managers earn their money.
  • Annual Management Charge, which can be up to 1.5% of your investment value. Again this is so the fund can make money to pay the managers.
  • Exit charges. When you sell your units, you might be faced with a small admin charge. This is uncommon, but I thought you should be aware that some funds do have these in place.

You Never Own The Assets

When investing in a unit trust, you don’t own any of the assets such as shares or property that the unit trust invests in. You own units, that’s it.

However, those units are directly linked to the value of the unit trust so in most cases, you will see significant capital gains even though you do not own the assets.

Where can you Buy a Unit Trust?

You can find most Unit Trusts on online brokerage accounts or bank & building society accounts.

If you have investments in either eToro, M1 Finance, or Trading 212 you can find Unit Trusts to invest in directly from there.

Other places you can buy Unit Trusts are:

  • Directly through the fund management company
  • Through an agent involved in the fund
  • Through an independent financial advisor

Final thoughts

In this article, we tried to make a simple beginner’s guide to unit trusts. In fact, we made them seem a lot more simple than what they really are. If we try and get too technical, it is often that beginners will walk away with a lot of misconceptions. As a beginner investor, you want to avoid having any misconceptions about any form of investing.

It is easy to make mistakes and lose money but unit trusts offer somewhat of a safety net. With all the regulations that they are under and with their hierarchy system, they are relatively safe. If you are in it for the long term, you can see significant gains in your wealth by investing in unit trusts as part of a diverse portfolio.

Chris Race

I am an accountant from the U.K. specialising in Management Accounting, Personal & Business Tax, Financial Analysis, and Wealth Management. My passion for learning is what lead me to creating this blog. Stock market investing has always been a interest of mine, and since I was 18 years old... This interest has become a source of income for me and my family.

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