Unit Trusts

An investment organization that attracts funds from individual investors by issuing units to invest in a range of securities (e.g. shares or bonds). It is open-ended, the number of units expanding to meet demand.

With unit trusts the securities purchased by the investor are called units. The value of these units is determined by the market valuation of the securities owned by the fund. So, if, for example, the fund collected together US$1 million from hundreds of small investors and issued 1 million units in return, each unit would be worth US$1. If the fund managers over the next year invest the pooled fund in shares which rise in value to US$1.5 million the value of each unit rises to US$1.50.

Unit trusts are open-ended funds, which means that the size of the fund and the number of units depend on the amount investors wish to put into the fund. If a fund of 1 million units suddenly doubled in size because of an inflow of investor funds (not because the underlying investments rise in value), it would become a fund of 2 million units through the creation and sale of more units. So, if the example trust with 1 million units attracts a lot of interest because of its great first year performance it might sell an additional million units at US$1.50 each to become a fund with total assets of US$3 million.

Unit holders sell units back to the managers of the unit trust if they want to liquidate their holding (turn it into cash). The manager would then either sell the units to other investors or, if that is not possible because of low demand, sell some of the underlying investments to raise cash to redeem the units. Thus the number of units can change daily, or at least every few days.