Unit Trust

Unit Trusts allow investors to access a diversified portfolio of assets, spreading their investment across a wide range of securities.
Unit Trust
3 min
09-June-2024

A unit trust stands out as a type of mutual fund designed to pool resources from investors, known as unit holders, under the guidance of a fund manager. This pooled capital is then strategically allocated across various investments and assets by the fund manager to achieve specific returns. Typically, unit trusts generate returns by investing in a diverse array of well-performing assets, including company shares, bonds, property funds, and other investment vehicles. These returns are often disbursed to investors on a quarterly or bi-annual basis, offered in the form of either income or growth, with investors typically having the flexibility to choose their preferred payout method.

What is a unit trust?

A unit trust is like a mutual fund where money from many investors is managed by a fund manager to make a certain return. The manager invests in bonds or shares, creates a portfolio, and splits it into units which investors buy.

Unit trusts are popular with people who want to invest in a mix of assets but don't have the time or knowledge required. The value of investments can go up or down, so you may end up with less money than you started with.

How is a unit trust managed?

Unit trust fund management is overseen by fund managers who direct and manage the trust's portfolio. Trustees ensure that the fund manager follows the trust's investment goals, acting in the beneficiaries' best interests. Unit owners are called unit-holders, holding rights to the trust's assets, with registrars serving as intermediaries.

How do unit trusts make money?

Unit trusts generate income based on the total number of units multiplied by the unit price, minus fees and costs. The unit price is determined by dividing the fund's net asset value (NAV) by the total number of units. When money is added to the trust, more units are created at the current price. When units are withdrawn, assets are sold to match the current unit price.

Fund managers earn money from the difference between the buying price (offer price) and selling price (bid price), known as the bid-offer spread. This spread is influenced by the managed assets.

How can you invest in a unit trust?

Investing in unit trusts offers various avenues, such as acquiring income units or accumulation units. Income units furnish regular payouts to investors, whereas accumulation units reinvest earnings into the trust. The choice between these depends on individual and financial circumstances, along with the trust's dynamics. Assessing risk levels and return potentials across unit types is crucial. While unit purchases are available directly from fund management firms, consulting a broker or financial advisor for tailored guidance is advisable.

Are unit trusts low-risk?

Unit trust risk depends on the underlying investments the trust holds. Generally, diversified unit trusts that spread their holdings across different asset classes (stocks, bonds, commodities) tend to be less risky compared to investing in individual stocks. However, some unit trusts may focus on specific sectors or high-growth companies, which can be riskier but potentially offer higher returns.

How do dividends work in unit trust funds?

Unit trusts may distribute a portion of their profits to investors periodically (monthly, quarterly, or annually) as dividends. The amount you receive is based on two factors:

  • Number of units held: The more units you own in the trust, the larger your share of the dividend payout will be.
  • Declared dividend: The unit trust company determines the dividend amount based on their overall profitability.

How do you grow your wealth with unit trusts?

Unit trust growth comes from two potential sources:

  • Capital appreciation: The underlying value of the assets held by the unit trust can increase over time. As the unit price reflects the combined value of these assets, an increase in their value leads to a rise in the unit price, potentially generating capital gains when you sell your units.
  • Dividend income: Regular dividend payouts from the unit trust can provide a steady stream of income, contributing to your overall wealth growth.

Remember, unit trust investments are subject to market fluctuations. While diversification helps manage risk, there's no guarantee of profit. A long-term investment horizon and a well-diversified portfolio containing unit trusts suited to your risk tolerance are key factors for potentially growing your wealth over time.

Pros and Cons of a unit trust

A unit trust has advantages and disadvantages, just like any other type of investment.

Advantages Disadvantages
Mentored by a financial expert The fund manager is responsible for the trust's performance
Investments in a diverse portfolio are included in one unit. Fees for management
There is no commitment or set investment period needed. The principal amount is not certain

 

How do unit trusts differ from mutual funds?

A unit trust fund and a mutual fund are types of investment pools where people invest together in many different stocks, bonds, or securities. The big difference is how they are bought and sold.

A unit trust fund lets investors buy units in the fund, which go up or down based on the total value of the assets. The price is set once a day, and investors can trade units at that price.

A mutual fund lets investors buy and sell shares directly from the fund company at the end of each trading day. The price is based on the value of the assets. Mutual funds may have different types of shares with varying fees.

Both unit trust funds and mutual funds give diversification and professional management, but the main differences are in how they work and how they are traded.

Key takeaways

A unit trust is a mutual fund where investors own units instead of shares in a company

  • Unit owners are called unit-holders, holding rights to the trust's assets, with registrars serving as intermediaries
  • The fund is managed by a professional and typically includes a variety of assets
  • A unit trust's beneficiaries are the investor and the fund manager who oversees the trust's investments

Conclusion

In simple terms, when you invest in a unit trust, your money is combined with others to create a fund. The manager invests this money in different things, divides it into units, and you hope that the value of these units goes up over time. Finally, you can sell your units for a profit.

Unit trusts are generally good investment choices for beginners and experienced investors. They spread your money out over many different investments, so you face less risk. You can easily buy and sell units when you want.

However, as with any other type of investment, consider the risk involved with unit trusts. There are fees to pay for management, even if the fund doesn't do well. You have limited control over your investment, as it is managed by someone else. There is a chance that you could lose some or all of your initial investment. So, invest wisely and only after thorough research.

The Bajaj Mutual Fund Platform features multiple tools, from an online lumpsum calculator to a SIP calculator, intending to make mutual fund investment planning easier. The Bajaj Finserv Mutual Funds Platform, with over 1,000 mutual funds to choose from, can be the ideal place to begin your investment journey.

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Frequently asked questions

How do you invest in unit trust?
Investing in unit trusts involves researching funds, assessing risk tolerance, selecting suitable funds, opening an account with a financial institution, and investing either in a lump sum or regularly. Research fund performance, fees, and manager track records to make informed decisions.
Is unit trust a good investment?
Whether unit trusts are a good investment depends on factors like your financial goals, risk tolerance, and market conditions. They spread your money out over many different investments, so you face less risk. You can easily buy and sell units when you want. However, before investing, consider the risk involved with unit trusts. Assess suitability based on your individual circumstances and investment objectives.
How do I know which unit trust to invest in?
To choose the right unit trust, align fund objectives with your investment goals, match risk profiles, consider historical performance, compare fees, and evaluate the fund manager's expertise. Focus on long-term consistency rather than short-term gains and ensure the fund aligns with your investment strategy.
What is a unit investment trust?
An investment company that provides investors with a fixed portfolio, often consisting of stocks and bonds, as redeemable units for a predetermined amount of time is known as a unit investment trust (UIT). It is intended to yield dividend income and/or capital growth. Investment companies include mutual funds, closed-end funds, and unit investment trusts.
What is a disadvantage of a unit trust?

Unit trusts often have fees associated with entry, exit, and management, which can eat into your returns. Additionally, their value fluctuates with the market, so there's no guarantee of profit.

Is a unit trust risky?

The risk depends on the type of unit trust. Diversified options spread risk, while those focused on specific sectors might be riskier but offer potentially higher returns.

Is a unit trust tax-free?

In India, dividends from unit trusts are generally taxed as income. However, some tax-saving unit trust options offer benefits like tax-free growth under specific conditions.

What is the return of a unit trust?

Your return comes from two sources: capital appreciation (increase in the unit price) and dividend payouts. However, past performance doesn't guarantee future results.

Is a unit trust better than EPF?

It depends on your goals. EPF offers guaranteed returns and tax benefits but lower potential growth. Unit trusts offer potentially higher returns but with market risks and taxation.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.