What are Unit Trusts?

Investment banks

Unit trusts (mutual funds) are investment banks whose purpose is to invest the funds pooled by investors.  Their objective, via the management of a series of assets, is to create value for the fund managers and for the investors who invest their money.

There are three main components characterising a unit trust/mutual fund (herebelow, for simplicity, just “fund”):

• The fund participants, also referred to as unit-holders: these are the investors who invest in the fund’s assets, using their capital to acquire units
• The management company, in other words the management hub of the fund’s operation whose responsibility is to launch the fund, lay down its rules and manage its portfolio
• The custodians which have physical custody of the fund’s securities and hold its liquid assets for safe keeping.  The role of the custodian also includes checking the legitimacy of the fund’s assets based on the requirements laid down by the Bank of Italy and in the fund rules   
• The charges incurred by investors entering a unit trust are as follows:
• The entrance fee or subscription fee, which is paid at the time of the initial purchase.  It is normally inversely proportionate to the size of each investment (the more you invest, the less you pay) and is higher for the so-called equity funds than for the balanced funds.  There are also some funds that do not provide for an entrance fee: these are referred to as “no-load” funds
• The management fee is the charge incurred by the unit-holder for the fund’s management.  It is calculated annually, but is normally paid on a six-monthly, quarterly or monthly basis.
• The additional performance fee, on the other hand, is an optional fee autonomously decided by some funds as a self-reward in the event that, owing to their ability, the fund returns exceed a certain threshold based on set parameters

The value per unit of the various funds is published, on a daily basis, in the newspapers.  Moreover, on the Borsa Italiana website it is possible to track the price trend of the various fund units in just the same way as share price performance is followed.  The prices in question already include the fund’s yield.

There are various types of unit trust funds, the most well known being the following three:

• Equity funds, these invest primarily in shares or convertible bonds.  They are generally more risky, but tend to guarantee higher yields and in any case guarantee smaller fluctuations with respect to straightforward equities since they normally offset their equity component with non-equity investments such as ordinary bonds, Government securities and liquid holdings.  Another way in which a balancing of risks is generally achieved is to diversify the fund’s investments geographically and therefore also by currency
• Bond funds, these are funds which invest above all in ordinary bonds and Government securities: this type of fund normally offers the advantage of being less risky, but the disadvantage of being less lucrative
• Balanced funds, are funds which aim to balance the various investment forms so as to achieve performances and risk profiles that are half-way between equity and bond funds