A unit trust is an investment fund contributed by several investors for investment in a portfolio of securities – stocks, bonds, money market instruments, real estate, amongst others which is managed by a fund manager.
It is simply an investment vehicle that seeks to employ the perceived professional skill of a fund manager to invest on behalf of diverse investors who pool their funds together for that purpose.
Why investors choose to rely in Unit Trusts:
- The expectation of better results than the individual hopes to personally achieve.
- It allows them benefit from a wider basket of investment assets, which the manager is able to invest in with the pooled funds.
Unit funds are denominated in units, similar to stocks, and each investor buys into the funds by acquiring its units. In effect, what the investors directly receive is a certificate of ownership of a certain number of units of the fund, not the specific stocks, bonds or any other investment assets of the fund.
The fund’s assets can be fluid, as the manager switches assets based on his reading of market opportunities. It is the prerogative of the fund manager to choose assets to invest in and the individual investor is not consulted. However, to protect investors and meet their investment aspirations, each fund has its defined investment perimeter. In effect, what areas of investment it can undertake and the range of possible asset allocation to each asset class are usually spelt out on its approved operational framework. The investor therefore knows the investment sector his money is being channeled into but not necessarily the specific assets.
In Nigeria, Unit trusts are regulated by the Securities and Exchange Commission (SEC), which scrutinizes and approves applications to operate such schemes. SEC, therefore has the primary duty to protect investors in such funds.
There are 2 Types of Unit Trust schemes available namely:
- Open-Ended:
This is a Fund that continuously creates issues and redeems units after the initial public offering. The price is based on the Net Asset Value (NAV), which is total asset of the fund minus liabilities as at date of purchase or redemption.
- Closed-Ended:
In a Closed-Ended Fund, there is no additional issue of new units or redemption of units. The Fund is usually listed and traded on the Stock Exchange and its price is determined by the market forces of supply and demand. A unit holder who wants to redeem his unit will therefore have to go through his Stockbroker.
The key parties to a Unit Trust Scheme are:
- Fund manager
- Trustee
- Custodian
- Registrar
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