A mutual fund is a collective investment that uses money from different people and invests it on their behalf. Unit trusts are registered investment companies that buy specific stocks, bonds or other securities found in a particular sector or industry. These units of the trust are then sold to the investors. Trusts are considered low risk and low return investments. There are many differences between the two, the most notable is that, funds are actively managed while unit trusts are left to grow on their own.
The annual operating costs are lower for trusts than they are for funds. In addition, trusts have sales charges, entrance and exit fees which are not applicable for funds. The fund managers are able to buy and sell shares regularly. However, this can only take place when the transaction meets the stated objective. The purchase and sale of securities of a trust can only happen during special circumstances. In a mutual fund, you will find that, capital gains are distributed to the shareholders. The case is however different for unit trusts where, there is no capital gain for distribution. What is distributed to the shareholders in trusts is dividend income.
Unit trusts are given fixed terms such as one year or twenty years. Mutual funds on the other hand do not run out of time as they are ongoing operations. Trusts are given individual investment objectives which the fund manager has to achieve. For funds, there are no set objectives. Funds can either be open-ended or close ended. Trusts are however only open-ended instruments. This means that, the size of a trust is determined by the number of investors and the value of their investments.
Other differences include the fact that buying and selling of trust shares does not result in tax requirements for the other shareholders. This is because, at any given time there is a fixed number of shares available. However, for mutual funds the case is different. When a shareholder sells shares it could result in liquidation of the fund. This then results in the fund getting capital gains which are then distributed to the members of that fund. In addition, units only distribute dividend income to its members either on a monthly basis or after every three months. In the case of funds, you get to decide when you want to receive your payments.