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What is a unit trust?

A unit trust is a type of investment that involves buying units of a trust fund. This money is pooled with your fellow investors and invested in asset classes chosen by a singular fund manager, who will consider the potential for risk and return on investment. There can be an unlimited number of investors in a unit trust and, similarly, an unlimited amount of money invested. Unit trusts also invest in a wide variety of different industries and products and typically involve a diverse portfolio – although this can depend on the size of the trust fund.

How does a unit trust work?

A unit trust essentially pools together the money of multiple different investors to create one central fund. This is managed by a trust fund manager, who makes the decisions about what to invest in based on region, sector, and asset class.

When you join a unit trust, you will need to know the Net Asset Value price. This is worked out by dividing the total value of the trust’s assets by the number of units that have been issued. The purchase price is then made up of the Net Asset Value price and any administrative costs.

Once you have purchased your units, your money has the potential to increase or decrease depending on the success of the investments. You can opt to sell your units at any point – although you will want to make sure the sale price is higher than the price you initially paid to ensure you don’t lose money.

How can you invest in a unit trust?

You can invest in unit trusts in multiple ways, such as through purchasing income units or accumulation units. Income units operate by providing regular payouts directly to the investor, while any earnings accrued by accumulation units are reinvested back into the trust. The type of investment you will want to go for will depend on your personal and financial circumstances, as well as those of the trust you’re investing in. It’s worth considering the risk level of the trust’s investments and the potential for return on all unit types.

Units are sometimes sold directly through a fund management company, although you may also want to speak to a broker to help you find the right trust to suit your needs. It’s also always worth speaking to your financial advisor for expert advice on the type of trust you should invest in, the amount of money you should invest, and when would be the best time to buy and sell.

Investment trusts vs. unit trusts

There’s not always a noticeable difference in the types of investments that investment trusts and unit trusts make. However, one key difference between an investment trust and a unit trust is that a unit trust is “open-ended” – meaning there can be an unlimited number of investments. The fund simply grows as more investors are added. Investment trusts, however, have a fixed number of shares, and these can be bought or sold amongst investors, but new shares cannot be created.

Unit trusts are often more flexible and can see more fluctuation. This is because the trust will buy shares back from sellers who wish to opt out, effectively shrinking the fund. Investment trusts, on the other hand, have a fixed number of shares that are bought and sold amongst investors and so can often see more long-term stability.

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