What Are Unit Trusts & How Do They Work

A unit trust is an investment fund which enables you to invest in world markets, particular markets or even particular market sectors.The unit trust funds are set up by financial institutions and these financial institutions manage the unit trust funds for you. Instead of shares you buy units and this can be done through a stockbroker, independent advisors or the fund manager. Unit trust funds are called "open ended funds" and this is because when you invest some money in them your money is added to the large pool of funds already invested in that unit trust portfolio. Unit trusts have both a buy and a sell price and the unit trust prices are calculated once a day.

When you place your order for a unit trust, you do not know the price as the funds are forward priced which means that when you buy the unit trusts, you get the price which is calculated at the next valuation. A unit trust usually does not hold more than 5% of its fund value in any one security. So this means unit trust funds have funds in at least 20 different companies although they often invest in many more than that. Unit trusts do not have to pay any capital gains when they sell or buy their shares although you as an individual investor would be subject to capital gains tax if you have already used up your capital gains tax allowance