Unit trust and fixed unit trust | Wilson & Assoc Chartered Accountants

Differences Between a Unit Trust and a Fixed Unit Trust

When considering a trust investment structure, understanding the differences between a unit trust and a fixed unit trust is essential. These two investment vehicles, while similar in some respects, have distinct characteristics that can have profound implications on investment management models. This article highlights the key differences between a unit trust and a fixed unit trust.

What is a Unit Trust?

A unit trust is a type of collective investment scheme where investors pool their money to invest in a diversified portfolio of assets, such as stocks, bonds, or properties. The trust is managed by professional fund managers who make investment decisions on behalf of the investors. Here are some key features:

•   Variable Unit Holdings: Investors can buy and sell units at any time, and the number of units they hold can vary.

•   Dynamic Investment Strategy: The fund manager can adjust the portfolio in response to market conditions, buying and selling assets to optimize returns.

•   Unit Price Fluctuations: The price of units can change daily based on the net asset value (NAV) of the underlying investments.

•   Distributions: Income generated by the trust (e.g., dividends, interest) is typically distributed to unit holders periodically.

What is a Fixed Unit Trust?

A fixed unit trust is a specific type of unit trust where the structure and composition of the portfolio are set at the inception and remain relatively unchanged throughout the life of the trust. Here are its distinguishing features:

•   Fixed Unit Holdings: The number of units held by investors is fixed at the time of purchase and does not change.

•   Static Investment Strategy: The portfolio is predetermined and does not change significantly over time. There is minimal buying and selling of assets.

•   Stable Unit Price: The unit price is relatively stable, primarily reflecting the income generated by the underlying investments rather than market fluctuations.

•   Capital and Income Distribution: Investors receive regular income distributions, and at the end of the trust’s term, the capital is returned to the investors.

Key Differences

FeatureUnit TrustFixed Unit Trust
Unit HoldingsVariable; investors can buy/sell units freelyFixed; unit holdings are set at purchase
Investment StrategyDynamic; actively managed portfolioStatic; predetermined portfolio
Unit PriceFluctuates with NAV of underlying assetsRelatively stable; influenced by income generation
LiquidityHigh; units can be bought/sold at any timeLow; typically no secondary market trading
Portfolio ManagementActive; fund manager makes regular adjustmentsPassive; minimal changes to the portfolio
Income DistributionPeriodic distributions based on earningsRegular income distributions, capital returned at term end
Market SensitivityHigh; sensitive to market movementsLow; less influenced by market volatility
Suitability for InvestorsSuitable for those seeking flexibility and active managementSuitable for those seeking stability and fixed returns

Considerations for Investors

1. Risk Tolerance:

•   Unit Trust: More suitable for investors willing to accept market volatility and seeking potential capital growth.

•   Fixed Unit Trust: Better for investors looking for stable income and capital preservation.

2. Investment Horizon:

•   Unit Trust: Flexible for both short-term and long-term investment horizons.

•   Fixed Unit Trust: Typically has a set term, making it suitable for medium to long-term investments.

3. Income Needs:

•   Unit Trust: Potential for higher income variability based on market performance.

•   Fixed Unit Trust: Offers predictable and stable income streams.

4. Liquidity Requirements:

•   Unit Trust: High liquidity, easy to enter and exit.

•   Fixed Unit Trust: Low liquidity, as units are not typically traded on a secondary market.

Conclusion

Both unit trusts and fixed unit trusts offer unique advantages and are suited to different types of investors. Understanding the fundamental differences between them can help investors make informed decisions that align with their financial goals, risk tolerance, and investment horizons. It is always advisable to consult with a financial advisor to determine which type of investment is best suited to individual needs and circumstances.

About Wilson & Assoc

Wilson & Assoc Chartered Accountants provides taxation and business advisory services to individuals, investors and businesses wherever you are based. We provide specialist services to startups and health care providers.

If we can help in any way, we’d like to hear from you.

Disclcaimer: The information provided within this article is general information only.  None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.

Copyright © Wilson & Assoc Pty Ltd. All rights reserved.