A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on the trust, it may invest in securities such as shares, bonds, gilts, and also properties, mortgage and cash equivalents. Those investing in the trust own "units" whose price is called the "net asset value" (NAV). The number of these units is not fixed and when more is invested in a unit trust (by investors opening accounts or adding to their accounts), more units are created.
There are a number of collective investment schemes — Unit Trust, Open-ended investment company, Mutual fund, Unit investment trust, Closed-end fund — with similar objectives and/or names, sometimes confused with each other. Variations include open-ended and closed-ended, business trust or management company/corporate structure, Actively managed or un-managed.
In the UK there are generally two types of open-ended, actively managed investment companies:
In Western Europe there are
In the United States
Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Unit trust trades do not have any commission.
The fund manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid–offer spread. The bid–offer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets like UK/US government bonds, to 5% or more on assets that are harder to buy and sell such as property. The trust deed often gives the manager the right to vary the bid–offer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. In some jurisdictions the bid–offer spread is referred to as the "bid–ask spread".
To cover the cost of running the investment portfolio the manager will collect an annual management charge or AMC. Typically this is 1 to 2 percent of the market value of the fund. In addition to the annual management charge, costs incurred in managing and dealing the underlying assets will often be borne by the trust. If this is the case, the provider will extract revenue equal to the AMC without incurring any expenses managing the fund. This makes the charges in such vehicles lack transparency.
In a unit trust, units are managed within what is known as the "Managers Box". The Box Manager of the fund will make a decision at each valuation point whether or not to Create (add) or to Liquidate (Remove) units based on the final net sales and redemptions prior to the next valuation point where the Fund is priced on a "Forward Basis", or at the actual valuation point where the fund is priced on an Historic basis. Forward pricing is the most common.
The underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.
A unit is created when money is invested and cancelled when money is divested. The creation price and cancellation price do not always correspond with the offer and bid price. Subject to regulatory rules these prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The trading profits based on the difference between these two sets of prices are known as the box profits.
In the UK many unit trust managers have converted to open-ended investment companies (OEICs) in recent years. OEICs normally have a single price for purchase and sale, although recent regulatory change now permits dual pricing too, in line with unit trusts.
The motivation for conversion is often cited as a simplification and precursor to offering funds Europe-wide under EU rules.
More cynical observers may have noted that there is increased latitude to hide charges in the OEIC Dilution Adjustment (more commonly referred to as "Swinging Single Price") whilst maintaining the veneer of simplification.
In the United States, unitholders of Unit Trust Funds are often treated as partners for tax purposes. Much like investments in MLPs, unitholders are typically issued a K-1 rather than a Form 1099 at the end of each tax year.
The first unit trust was launched in the UK in 1931 by M&G under the inspiration of Ian Fairbairn. The rationale behind the launch was to emulate the comparative robustness of US mutual funds through the 1929 Wall Street crash. The first trust called the 'First British Fixed Trust' held the shares of 24 leading companies in a fixed portfolio that was not changed for the fixed lifespan of 20 years. The trust was relaunched as the M&G General Trust and later renamed as the Blue Chip Fund 
By 1939 there were around 100 trusts in the UK, managing funds in the region of £80 million.
In the UK, units can be bought direct from the fund manager, held through a nominee account or through an individual savings account (ISA). It is also possible to invest via fund platforms.
From 1 January 1987 to 5 April 1999 it was also possible to invest via a personal equity plan (PEP) however these were discontinued and all PEP accounts automatically became stocks and shares ISAs on 6 April 2008.