These charges together represent the whole of the additional cost a buyer of units has to bear, compared with the investors purchasing directly on the Stock Exchange (brokerage, contract and stamp duty are payable in both cases).

Control: Unit trusts are strictly controlled by the Department of Trade. A unit trust is set up by a trust deed, which is an agreement between the trustees and the managers of the fund.

The trust deed covers the main aspects of the running of the trust and has to be approved by the DoT. The essential characteristics of the deed are that it lays down the rights and responsibilities of all concerned, the provisions enabling new members to join, the maximum charges that can be made by the managers for administrating the fund and the provision for calculating the buying and selling prices of units.

Investment instructions: Unit trust managers are allowed only to invest in securities quoted on a recognised stock exchange, although they may also hold up to 25% of their funds in companies traded on the USM of which 5% may be held in unlisted securities, whether USM or not. Certain other investment constraints are included in the trust deed to ensure that each fund has a sufficiently diversified spread of risk.

The most important of these constraints is that no holding may be acquired which will result, at the time of purchase, in the trust holding more than 5% of its value in one investment. In practice, if an investment increases sufficiently in value after purchase it may well exceed the 5% limit, but as long as its value does not exceed 7.5% of the fund the trustees will not be too concerned.

Another restriction on the managers is that each trust must not hold more than 10% of the issued share capital of any company. But with management groups running a whole range of trusts it is not inconceivable that between their trusts they may together hold more than 10% of the share capital of one particular company. Additionally, unit trusts are not permitted to invest directly in property.


CCMG - 2013


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