About Unit Trusts

What is a Unit Trust

A unit trust works by pooling money from a number of investors and then using this money to buy a variety of investments. It gives you greater buying power, allows you to share costs and gives you the benefits of professional management.

When you invest, you buy 'units' - and the cost of each unit is the 'unit price'. The unit price moves up and down to reflect the value of the investments in the fund. Many income funds' unit prices stay at $1 as profits or income is distributed.

A Unit Trust may aim to provide either regular investment income with a small element of capital growth or, conversely, may aim to provide strong capital growth with little or no regular income for investors. Before investing it is the investors responsibility to ensure that they clearly understand the mandate of the fund.

This information is contained in each fund's respective investment statement.

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Nature of a Trust

A trust is a legal structure that comes into existence when the person holding the legal title to property (i.e. legal ownership) is bound by an obligation to hold their interest in the property not for their own exclusive benefit but for the benefit of other persons.

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Main Parties to a Unit Trust

The three parties to a Unit Trust are:

The Trustee

  • Holds legal title
  • Ensures compliance with trust deed
  • Audits accountants
  • Distributes income
  • Releases money to manager for investment
  • Protects rights and interests of unit holders

The Manager

  • Invests the money
  • Markets the fund (this is often outsourced)
  • Values the fund¬†(this is often outsourced)
  • Handles communication
  • Reports to the Trustee
  • Reports to the unit holders

The Investor

  • Entitled to full share of gain (capital and income)
  • May remove either trustee or manager
  • Exercises control by switching

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The Prospectus and Investment Statement issued by a Unit Trust Manager clearly states the costs, charges and fees associated with investment in the particular trust.

Initial Charge or Service Fee

This charge is included in the sell price of units and varies quite widely depending on the type of trust, but can be up to 6%.

Recurring Management fee

This fee is paid out of the Trust income or assets and is therefore not charged directly to each unit holder. While it can vary quite widely depending on the type of trust, it is normally in the range of 0.25% to 1.75% per annum of the value of the assets.

Other Charges

Many trusts make a minor additional charge to pay for the trustee's services. This is usually in the range of 0.1% to 0.15% per annum of trust assets and is deducted from the trust income or assets.

Some Unit Trust managers make further deductions from the trust income in respect of administration expenses, disbursements, audit fees and the like. These expenses when charged separately do not normally exceed 0.5% per annum of the value of the of the Trust assets.

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