Definition
The term unit trust refers to a pooled investment fund that holds assets and distributes profits directly to shareholders. Unit trusts are typically closed-end funds; which means the number of shares is fixed and does not increase or decrease over time.
Explanation
Also referred to as a unit investment trust (UIT), a unit trust (UT) allows investors, or unit holders, to pool their money together to purchase assets. The fund is structured as a trust, with the investors as beneficiaries. Assets held in the trust, and selected by a fund manager, typically include real estate and mortgages in addition to more traditional securities such as stocks and bonds.
The value of the underlying assets can be determined by multiplying the total number of units issued by the trust's Net Asset Value (NAV); although unit shares may sell on the secondary market at prices that are above, or below, the trust's NAV. The advantages of unit trusts include the ease of buying and selling shares (liquidity), and the use of professionals to manage the trust's assets.
Unlike a mutual fund, the assets in a unit trust investment are not actively traded. Instead, the portfolio will consist of a relatively small number of investments when compared to a mutual fund. UITs may also charge investors a sales fee or load, oftentimes close to 5%. Finally, unit trusts will also carry a termination date, on which the trust will distribute the proceeds from the sale of assets to the unit holders.