A mutual fund is a collective investment that uses money from different people and invests it on their behalf. Unit trusts are registered investment companies that buy specific stocks, bonds, or other securities that are in a particular sector or industry. These trust units are then sold to investors. Trusts are considered low-risk, low-return investments. There are many differences between the two, the most notable being that funds are actively managed, while mutual funds are left to grow on their own.
Annual operating costs are lower for trusts than for funds. Additionally, trusts have sales, entry and exit fees that are not applicable to the funds. Fund managers can regularly buy and sell shares. However, this can only take place when the transaction fulfills its stated purpose. The buying and selling of securities in a trust can only occur in special circumstances. In a mutual fund, you’ll find that capital gains are distributed to shareholders. However, the case is different for unit trusts where there are no capital gains for distribution. What is distributed to the shareholders in the trusts is the dividend income.
Unit trusts have fixed terms, such as one or twenty years. Mutual funds, on the other hand, don’t run out of time as they are ongoing operations. Trusts have individual investment objectives that the fund manager must achieve. For funds, there are no set targets. Funds can be open or closed. However, trusts are only open instruments. This means that the size of a trust is determined by the number of investors and the value of their investments.
Other differences include the fact that the purchase and sale of trust shares does not generate tax requirements for the other shareholders. This is because, at any given time, there are a fixed number of shares available. However, for mutual funds the case is different. When a shareholder sells shares, it could result in the liquidation of the fund. This then results in the fund earning capital gains which are then distributed to members of that fund. Additionally, the units only distribute dividend income to their members, either monthly or every three months. In the case of funds, you decide when you want to receive your payments.
