* A unit trust fund is a collective form of investment whereby the financial resources of individuals and corporate investors with the same investment objective are pooled together for the purpose of making large-scale investments in a selected portfolio of securities.
* The pool of money is split into a number of equal parts called units. Each unit represents exactly the same proportion of the value of shares held by the unit trust. As an investor, you "buy into" the pool by purchasing these units. The fund managers then use this pool of money to invest in a wide range of stocks, bonds and other money market instruments.
* The fund is set up under a Trust Deed. The Trustee holds the assets in the fund and monitors the way the fund manager invests. Let me elaborate further...
Who are parties involved?
1) The Unit Holders / Investors
* People like you and me with similar investment objective, combine our money together to buy into the Unit Trust of our choice. We will receive units of which the value is based on the underlying assets.
* Example: 100 people invested $1,000 each. There will be a collective sum of $100,000. The fund manager creates a unit trust of 100,000 shares valued at $1 per unit and each investor will get 1,000 units. Assuming after 1 year, the underlying assets of $100,000 grew to $120,000. As the number of units remains at 100,000, the value of the units will become $1.20 each. If the investor sold his 1,000 units, he will sell it for $1,200, a profit of $200.
2) The Fund Manager / Fund Management Company
* The fund manager job is to act in the interest of the Unit Holders by making the best investment decision with their money. Other than the day-to-day investment management, the fund manager also prepares the semi-annual performance report and the declaration of dividends.
* The fund manager, are supposedly be experienced and skilful enough to devise strategies in picking stock from the universe of companies.
3) The Trustee
* The Trustee is a corporate body approved by the Minister of Finance, independent from the Fund Manager. Their role is to act as the custodian of the Unit Trust and to ensure that the Fund Manager invest the Unit Holders’ money in accordance to the Trust Deed.
* They can be considered as the “watchdog” to protect the interest of the Unit Holder. They will help minimize the risk of mismanagement by the fund manager.
Who are parties involved?
1) The Unit Holders / Investors
* People like you and me with similar investment objective, combine our money together to buy into the Unit Trust of our choice. We will receive units of which the value is based on the underlying assets.
* Example: 100 people invested $1,000 each. There will be a collective sum of $100,000. The fund manager creates a unit trust of 100,000 shares valued at $1 per unit and each investor will get 1,000 units. Assuming after 1 year, the underlying assets of $100,000 grew to $120,000. As the number of units remains at 100,000, the value of the units will become $1.20 each. If the investor sold his 1,000 units, he will sell it for $1,200, a profit of $200.
2) The Fund Manager / Fund Management Company
* The fund manager job is to act in the interest of the Unit Holders by making the best investment decision with their money. Other than the day-to-day investment management, the fund manager also prepares the semi-annual performance report and the declaration of dividends.
* The fund manager, are supposedly be experienced and skilful enough to devise strategies in picking stock from the universe of companies.
3) The Trustee
* The Trustee is a corporate body approved by the Minister of Finance, independent from the Fund Manager. Their role is to act as the custodian of the Unit Trust and to ensure that the Fund Manager invest the Unit Holders’ money in accordance to the Trust Deed.
* They can be considered as the “watchdog” to protect the interest of the Unit Holder. They will help minimize the risk of mismanagement by the fund manager.
* The tri-partite relationship between the Manager, the Trustee and the Unitholder is legally bound by the terms and conditions specified in the Trust Deed* The Trust Deed legal document that lays down the terms and conditions under which the Unit holders’ money is to be invested. It also spells out the investment objective and the responsibilities of the fund managers.
4) The distributor
* There are several channels through which an investor can buy a unit trust – The Manager, Banks, Stockbroker, Financial Planners, Insurance Companies and Internet based service providers.
* Distributors of unit trusts would need to hold a financial adviser’s licence or be an exempt financial adviser.
* They will conduct Risk Profiling and design a portfolio based on the investor’s needs and risk level.
I'll talk about why and why not invest in Unit Trust in my next posting...
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