What are Unit Trusts?
Unit trusts are also known as mutual funds
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).
The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. Most funds are overseen by a board of directors or trustees which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors.
A collective investment scheme is a way of investing money with others to participate in a wider range of investments than feasible for most individual investors, and to share the costs and benefits of doing so.
Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions (e.g., Emerging Europe) or specified industry sectors (e.g., Technology). Depending on the country there is normally a bias towards the domestic market to reflect national self-interest as perceived by policymakers, familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance and other factors such as fees
Structure
The fund manager runs the trust for profit.
The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets.
The unitholders have the rights to the trust assets.
The distributors allow the unitholders to transact in the fund manager's unit trusts
The registrars are usually engaged by the fund manager and generally acts as a middleman between the fund manager and various other stakeholders
[edit] Open-Ended
Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Unit trust trades does not have any commission.
[edit] Bid–Offer Spread
The trust manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid–offer spread. The bid–offer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets like UK/US government bonds, to 5% or more on assets that are harder to buy and sell such as property. The trust deed often gives the manager the right to vary the bid–offer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. In some jurisdictions the bid–offer spread is referred to as the "bid–ask spread". Nowadays, most funds operate on Net Asset value(NAV) with an initial sales charge and annual management fee.
To cover the cost of running the investment portfolio the manger will collect an annual management charge or AMC. Typically this is 1 to 2 percent of the market value of the fund.Unit Trust in India
