An organization for the collective purchase of shares, securities, etc. By spreading the investment risk over a large portfolio of investments, this risk is minimized; and by appointing experienced managers, profit, by way of dividend, interest or profit on sale, may be maximized for each individual member or unit holder. A unit trust is different from an investment company, because it is a mutual organization where the amount of capital can be varied according to the number of units in circulation, and because the shares or securities are held on trust for members and not as income-earning assets of a company.
Units are purchased initially in multiples of, say, 25p, an invitation being made to the public to take up units. The shares or securities are registered in the names of trustees, perhaps banks. There is a special management company responsible for buying and selling the shares and managing the affairs of the trust. This company makes its money from a percentage of annual income plus a percentage of the capital value of units issued. The company will normally belong to the Association of Unit Trust Managers. Every day it will state a buying and selling price for units. Units can be bought and sold by the management company itself. Prices of units are usually quoted in the daily papers. Some unit trusts specialize in seeking high income, others are more interested in capital appreciation, others again deal only in, say, preference shares, thereby hoping for a steady average high return. There are also differences in choice of industry, e.g. some trusts may specialize in certain types of manufacturer or producer, some may restrict themselves to Commonwealth countries or some may look to the European Union. The relative value of each to the investor depends on his point of view. There is a new development in the unit trust movement aimed at attracting wider membership and also at competing with Life Assurance Companies. Units are offered at prices which include life cover for the whole time that the units are held. The Finance Act 1968 made these schemes somewhat more complicated as far as tax saving is concerned.
|Reference: The Penguin Business Dictionary, 3rd edt.|