Investing for the future is important for those who are looking to retire and leave intergenerational wealth to their heirs. There are many options available to those looking to invest their capital to earn money. One relatively lesser-known method of investing in the market is through what is known as a unit trust or unit investment trust (UIT).
What is a unit trust?
Essentially an unincorporated mutual fund, a UIT enables funds to transfer profits directly from assets held to individual unit owners, rather than reinvesting these profits back into the fund. Usually, mutual funds are financial vehicles allowing multiple investors to combine contributed funds to invest in the markets. Unit trusts are different in they are formed through a trust deed and the funds are managed for the benefit of the beneficiary rather than investors.
How does a unit trust work?
A professional fund manager is in charge of operating a unit trust fund with the objective of making investment decisions to minimize risk while also aiming to earn capital gains and income for the benefit of the trust beneficiaries. The trustee is in charge of overseeing the fund manager to ensure the fund is being properly managed and decisions are being made in accordance with the objectives of the fund. Usually, the trustee is an individual or organization acting as a fiduciary which means the trustee is legally obligated to put the interests of beneficiaries first.
A unit trust is divided into what is known as “units.” The underlying value of the assets held by a unit trust is expressed by multiplying the number of units by the price per unit. Therefore, as the value of the assets held in the trust fluctuate, the price per unit will also move up and down.
How unit investment trusts earn profit
Units making up a unit trust are sold at prices that vary at different points in time depending on what happens in the financial markets. Unit trusts are structured to be open-ended which means new contributions and withdrawals from the pool of capital is permitted.
When funds are contributed into the unit fund from an investor, more units are created in order to match the current price of a unit. Alternatively, when funds are withdrawn, assets are then sold to match current pricing for a unit.
Managers of funds earn profit from the difference between the price of a unit when it is bought and the price when sold. The price to buy a unit is known as the “bid” price while the price to sell a unit is referred to as the “offer” price. The difference between the bid and the offer is called the “spread” which can vary depending on the types of assets that are being managed.
Complete your financial planning
Having a unit trust can be advantageous if it is properly formed to be customized to your needs. However, this is just one piece of the puzzle for a comprehensive estate plan. Our team of financial advisors are able to help you put together all of the puzzle pieces helping ensure your heirs are taken care of.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.