What is a unit investment trust for dummies? (2024)

What is a unit investment trust for dummies?

A unit investment trust (UIT) is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income.

What is a unit investment trust?

A unit investment trust (UIT) is a registered investment company that buys and holds a generally fixed portfolio of stocks, bonds, or other securities. “Units” in the trust are sold to investors (unitholders) who receive a share of principal and dividends (or interest).

What is the basic understanding of unit trust?

A unit trust is a type of mutual fund where money from many investors (called “unit holders”), is managed by a fund manager to achieve a specific return.

What does a unit investment trust represent?

UITs raise money by selling shares known as "units" to investors, typically in a one-time public offering. Each unit represents an ownership slice of the trust and gives the investor a proportional right to income and capital gains generated by the fund's investments, typically either stocks or bonds.

Why do people invest in unit trusts?

In contrast, unit trusts are more suitable for investors seeking reasonable long-term returns. Being prepared to hold on to their unit trust investment for at least five years or more enables their funds to reap reasonable returns as the companies invested by the funds have sufficient time to grow their profits.

What are the cons of unit investment trusts?

The drawbacks: Portfolio managers can't actively manage the assets held by a UIT. What's more, investors typically have to pay a sales charge, one-time organizational cost and annual expenses such as trustee and supervisory fees. A wide variety of asset classes and strategies are available to UIT investors.

What is a unit trust example?

A unit trust is a collective investment packaged under a trust deed. The fund manager may invest in bonds or shares on the stock market, and the fund is split into units, which investors purchase. Unit trusts provide access to securities, mortgages, and cash equivalents.

What are the risks of a unit trust?

You can make or lose money in unit trust funds, but the risk of losing money depends on where and how the fund invests. Generally the longer you can stay invested, the more likely you are to enjoy a good investment return. A unit trust fund is made up of equal portions called units.

Is it good to invest in unit trust?

Depending on the asset allocation, a unit trust investment has the potential for higher returns over the long term compared to more fixed-income options, such as fixed deposits or money market accounts. However, it is also exposed to market fluctuations, and your investment value can go up or down on any given day.

Does unit trust make money?

How do unit trusts make money? The trust makes returns by investing in well-performing assets, usually company shares, bonds, property funds, and other assets. The fund will pay out any quarterly or bi-annual returns as either income or growth, and you can usually decide how you want to receive the money.

Can you sell a unit investment trust?

While UITs are designed to be bought and held until they reach termination, investors can sell their holdings back to the issuing investment company at any time. 4 These early redemptions will be paid based on the current underlying value of the holdings.

Who should invest in unit trusts?

What are the risks of UIT?

Unit investment trust risks

As prices can fluctuate based on market concerns about financial condition, the UIT issuer may not be able to pay interest or repay principal. UITs holding fewer securities can have more price volatility than more diversified trusts with a greater number of holdings.

How does money grow in a unit trust?

The unit trust makes returns by investing in well-performing assets, usually company shares, bonds, property funds, and other assets. The fund will pay out any quarterly or bi-annual returns as either income or growth, and you can usually decide how you want to receive the money.

What are the pros and cons of unit trusts?

Investing in Unit Trusts offers several advantages, including professional management, diversification, accessibility, liquidity, and transparency. However, they also come with inherent risks, such as market, credit, interest rate, and inflation risks.

How long should I hold unit trust?

With Unit Trusts, a medium- to long-term investment (ie. 3 to 20 years) can give you much better returns than cash savings and fixed deposits in the long run.

Is my money safe in a unit trust?

The investments are relatively low risk, highly liquid and are best suited for risk averse investors who wish to get high interest returns and stability on their portfolios, Equity Funds (EF) - These are funds that buy ownership in businesses often in the form of publicly traded stocks.

What happens when a unit investment trust matures?

Investors may do nothing and allow the portfolio units to mature. The trust will liquidate and they will receive a cash distribution of the trust's proceeds, if any.

Are unit trusts good or bad?

Unit trusts are highly regulated, and investors can be confident that, while they're still subject to investment risks, they're not likely to be victims of fraud. There's a high level of transparency, as legislation requires disclosure about costs and details of the underlying portfolio.

Who owns the assets in a unit trust?

Unitholders are the owners of trust property and the trustee administers the trust. The trustee has a fiduciary duty to ensure that unit holders are treated equally. The fund manager is appointed by the trustee to manage the investment of the trust assets.

Is a unit trust tax free?

Tax-free Unit Trusts

By law you can save R36 000 every year or R500 000 over a lifetime in a tax-free vehicle such as a unit trust. All interest, capital gains and dividends you earn will be completely tax-free (only applicable to SA tax residents).

Is a unit trust taxable?

Unlike other types of investment (such as investment bonds), Unit Trust gains are usually taxed as 'capital gains' rather than 'income'. Depending on your personal circ*mstances, this can be advantageous, especially if you are a higher rate income tax payer.

Will unit trust lose money?

You may lose a substantial amount of the money you invested in certain situations. The risks of investing in the fund are described in the product offering documents such as the prospectus and the product highlights sheet. Fees can also reduce your returns.

What is the difference between a unit trust and an investment trust?

An investment trust at its simplest is just another type of fund, like a unit trust or open-ended investment company (OEIC), in that it's a type of pooled investment. However, unlike unit trusts and OEICs, an investment trust is a quoted company and listed on the stock exchange.

Is a unit trust equity or debt?

Fund type

Asset allocation: Certain UT invest exclusively in equity or only in debt while others may adopt a more balanced approach by having a mix of both equity and debt.