Technical Savings and Investments Information

Mutual Fund and Unit Trust
Investment funds differ in many ways and thus classification is difficult. Different names are often used depending on the jurisdiction. Investment funds are commonly known as mutual fund or unit trust.

(a) Mutual Fund
This is the simplest and most common situation. An investment company is set up with the objective of investing in shares of other companies and has only one type of investors, ie the stockholders for         whom it makes the investment. These stockholders own the investment company directly and thus own indirectly the financial assets that the company itself owns.

A mutual fund company has a board of directors that is elected by its stockholders. In turn, the board will commonly hire professional money manager, the management company, to manage the company’s assets.

These management companies may be authorized financial institutions, registered companies, or insurance companies. Often the management company is the business entity that started and promoted the mutual fund.

A management company may have contracts to manage a number of mutual funds, each of which is a separate organization with its own board of directors.

(b) Unit Trust
Trust is an old concept under English Common Law. This concept is recognized in common law countries such as the UK, Australia, Canada and Singapore. It is also adopted in Hong Kong. However, in other jurisdictions such as the US, Taiwan, Japan, France or Luxembourg, it is not recognized, instead mutual funds are adopted.

A unit trust is an investment vehicle set up under a trust. To form a unit trust, the investment company purchases a specific set of securities and deposits them with a trustee. The investors who share similar investment objectives then pool their money together for the investment into such types of assets.

A number of units known as redeemable trust certificates are sold to the public. These certificates provide their owners with proportional interests in the securities that were previously deposited with the trustee.
All income received by the trustee on these securities is subsequently paid out to the certificate holders, as are any repayments of principal.

An investor who purchases units of a unit trust is not required to hold them for the entire life of the trust. Instead the units usually can be sold back to the trust, at a price calculated on the basis of bid prices for the underlying assets in the portfolio, ie the market value of the securities in the portfolio. This is otherwise known as the Net Asset Value (NAV) per unit.

The NAV is derived using the following formula:
NAV = Total Assets – Total Liabilities Number of Units Outstanding

Having determined the per unit price, the trustee may sell one or some of the securities to raise the required cash for the repurchase.