What is a Unit Trust

A unit trust is a fund where money from many different investors is pooled together and used to invest in a portfolio of assets. These investments are chosen and managed by a professional fund manager, who aims to ensure that the returns generated are in line with the fund’s objectives. These investments are also overseen by an independent trustee, who ensures that the fund performs in accordance with its stated aims.

How are unit trusts structured?

When investing into a unit trust, your money will buy a weighted portion of the fund’s underlying assets. These weighted portions are known as units and, because a unit trust is an open-ended fund, there’s no limit to the cash they’re willing to accept.

This means that when it accepts money in, it creates more “units” to reflect the price of the underlying assets.

How do unit trusts earn money?

Since there’s no fixed supply of units, the price of your units aren’t influenced by demand for that trust. In theory, a wealthy investor can double the fund size overnight and it won’t affect your holdings.

Instead, you’ll only earn money if your underlying units gain value over time. Likewise, if your fund manager makes poor investment decisions, then your holdings will decrease in value.

But unit trusts aren’t designed to be traded like equities, they’re generally bought by investors who wish to make money over the long-term.

During the long-term, you’ll also earn dividends or interest from your unit trust. This can either be reinvested into the fund for more units or can be paid away to use elsewhere.