About Unit Trust Investments

In one of my articles I mentioned an investment vehicle known as Unit Trusts.  I would like to take a little time to discuss them as despite their usefulness they still remain one of the minor investment choices. 

There are principally two major types with the first being a money market unit Trust in which at least 50% of the investments must be in fixed interest instruments.  The second type is one in which less than 50% of the investments are in fixed interest instruments.  Thus the funds could be invested in real estate, in shares, in other assets or a combination of these.

The money market unit trust works on the concept that by pooling all the funds together a better rate of interest can be obtained by all.  This means that the person who puts five thousand dollars into the fund gets the same return as the person who puts a million dollars.  A fee is deducted from the fund each month and the total income is divided amongst all unit holders.  This is the only type of investment where all persons earn the same return which for small investors is usually higher than what they can obtain from other institutions.  There is one difference though, the investor is not paid interest, and instead what happens is that the unit price increases.  For example if you buy units at a price of $6 and it earns 11% then the price increases to $6.66.  This unit trust offers an added advantage for the long term saver as amounts up to $1 million if invested for five years can be encashed with no tax to be paid.
The second type of unit trust is tax free regardless of the amount or the time period, however these are riskier in that a significant portion of the funds may be in shares or property.  Because they are more risky, it is expected that a higher rate of return could be earned on these funds.  However when times are bad the returns on these funds can become negative and can reduce your original principal.  Effective management is needed for these funds in order to deal with a dynamic environment.
Unit trust are very similar to mutual funds but with one main difference.  The assets that support the investments of the unit holders are not held by the management company but are held in trust by a third party.  This means that if the management company were to go bankrupt the unit holders would not lose their investment.  There are four companies that offer these services (see Fridays Financial Gleaner), talk to one of them to get more information to see if it is for you.

Feedback question:  Have you ever purchased Unit Trusts and  how was the experience?

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