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A unit trust (UT) is a financial vehicle through
which individuals may invest their money. The idea behind unit trust is
better investment through collective investing. That is to say pooling the
investments of many investors, individuals and institutions.
Investing in a unit trust offers investors numerous advantages, including:
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Professional management at a low cost
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Safety through the spreading of risk
(diversification)
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Liquidity
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Ease of transaction
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Capital appreciation/income stream
The operation of a unit trust may be best
explained by outlining its similarities with the operation of a bank, with
which most individuals are familiar. Many individuals deposit money in the
banks, for which they receive interest. These individuals expect complete
liquidity where they must be able to withdraw their deposits in cash at any
time. The banks employ professional managers to look after the deposits. The
deposits are invested. These managers lend the deposits to other individuals
requiring funds and a host of other profit generating facilities of the
banks.
Similarly, unit trust holders wish to put their money to generate higher
returns. The goal of all investments is to make money more productive,
either through producing income or growth. Unit trust holders have liquidity
because their units can be readily converted into cash at any time. By
investing in unit trusts, it allows them to engage professional fund
managers at a low cost to the individual investors. These managers
diversifies the investment funds in many different securities and other
approved channels to spread the risk.
The unit trust is constituted through a document known as a deed which
brings together and binds the various parties to the deed:
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The trustee, who holds the assets of the trusts
on behalf of the unit holders.
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The manager, who is the promoter of the scheme
and provides investment and administrative expertise and markets units to
the public
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The unit holders who provide the funds for
investment and expect to receive the benefits derived from the investment.
The effect of dividing the beneficiaries' interest in the trust into units
is that their interest is quantified into discrete portions.
Particular advantages of unit trusts over the
pooled investments include :
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The provision of an independent trustee to hold
the trust's assets on behalf of unit holders and to watch over their
interests on an on-going basis.
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The deed and prospectus are scrutinized by
government authorities, prior to an offer of units being made to the general
public. The managers and trustee are themselves approved by the regulators.
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A buy back provision or covenant in each deed
which requires the manager to redeem an investor's units within specified
time limits at a price determined in accordance with the deed.
Provisions in the deed under which the manager
and trustee are in a fiduciary position in relation to the trust (i.e. they
can only profit in ways laid down under the deed). The investor can
determine in advance what costs and charges they will be required to pay to
join and stay in the trust.
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