Unit Trust (UT): What it is and how it works

Key takeaways

• A unit trust is an unincorporated pooled investment established under a trust deed.
• Investors buy units and are beneficiaries of the trust; a fund manager makes investment decisions.
• Unit price is based on net asset value (NAV) per unit; profits are passed to unit holders rather than being automatically reinvested.
• Structures and names vary by jurisdiction, but the concept is similar to mutual funds.

What is a unit trust?

A unit trust pools investors’ money to buy a diversified portfolio of assets (stocks, bonds, cash equivalents, mortgages, etc.). The fund is governed by a trust deed. Investors purchase units representing their share of the pool and are entitled to the trust’s income and capital gains in proportion to their holdings.

How it’s structured and managed

• Fund manager: makes investment decisions and runs the portfolio according to the fund’s objectives.
• Trustee: oversees the manager’s actions and safeguards beneficiaries’ interests (acts as a fiduciary).
• Registrar: handles record-keeping and liaises between unit holders and the fund manager.
• Unit holders: investors who own units and have rights to the trust’s assets and distributions.

Unit trusts are common in many jurisdictions (U.K., Australia, New Zealand, Singapore, South Africa, etc.). In some regions the term is effectively synonymous with mutual funds; in others (e.g., Canada) different names such as income trusts may be used.

How unit trusts make and distribute money

• Net asset value (NAV): the fund’s total assets minus liabilities, divided by the number of units outstanding, determines the unit price.
• Creation and redemption: new investments create units at the current offer (buying) price; withdrawals redeem units at the current bid (selling) price. The fund may buy or sell underlying assets to meet flows.
• Bid-offer spread: the difference between the offer price and the bid price; this spread (plus fees) contributes to manager compensation and covers transaction costs.
• Distributions: income and realized gains can be paid out to unit holders rather than being automatically reinvested.

Advantages

• Professional management by an investment specialist.
• Built-in diversification within a single unit.
• Flexible investment amounts with no fixed term or mandatory lock-up.
• Transparent pricing tied to NAV.

Disadvantages and risks

• Manager risk — performance depends on the fund manager’s skill and decisions.
• Management and transaction fees reduce returns.
• No capital guarantee — unit value and distributions can fall.
• Liquidity and pricing may be affected by the bid-offer spread and market conditions.

How unit trusts differ from mutual funds

The practical investment mechanics are similar, but a unit trust is legally organized under a trust deed with investors as beneficiaries. In many jurisdictions the terms overlap and are used interchangeably; the legal form and regulatory treatment vary by country.

Withdrawing money

To exit a unit trust, sell your units back to the fund (or on the market, if quoted) at the bid price. Profit requires the bid price to exceed the offer price originally paid, after accounting for fees and any distributions received.

Bottom line

Unit trusts provide a simple way for investors to access a professionally managed, diversified portfolio through units that represent fractional ownership of the trust’s assets. They offer flexibility and transparency but carry typical investment risks—performance depends on market movements and the fund manager, and fees reduce net returns.