Trust vs Fund
Trusts and funds are investment vehicles that hold assets of value. Since these terms are closely related, they are often confused to be the same. However, there are a large number of differences between a trust and a fund, how they are maintained, and who benefits from the investment returns. The following article offers a clear explanation of how a trust and fund functions, and outlines how they are similar and different t each other.
What is a Trust?
A trust is an agreement between two parties where one party’s assets are being transferred to another party, called a trust company that then maintains the assets and uses them for the benefit of a third party. There are a number of special terms used to explain the parties in such an arrangement. The party that transfers the assets to the trust company is called the ‘trustor’, and the trust company is called ‘trustee’. The third party who benefits from these assets is known as a ‘beneficiary’.
It must be noted that the assets of a trust are owned by the trustees and not by the trust fund. However, the trust fund is not owned by anyone and is a separate legal entity by itself. There is also a difference in asset ownership as the legal ownership of the assets lie with the trustees, but the ownership of the asset’s benefits lie with the beneficiaries. Therefore, the assets in the trust fund must always be maintained with the beneficiaries’ interest in mind.
What is a Fund?
A fund collects cash from a large number of smaller investors and invests the pooled funds in profitable investments. Funds provide investors with access to a larger number of securities and investment opportunities that may not be available for an investor individually. Since investment funds are managed in an active manner, there is a better chance that the investment company will be able to achieve their investment goals.
Shares are issued from the fund, where one share represents a percentage of ownership over the securities held by the fund. Funds are perfect for investors who do not have large sums of money to invest, who require a diversified portfolio of investments, minimal transaction costs and greater liquidity.
What is the difference between a Trust and a Fund?
Trusts and funds are quite different to one another, mainly when considering the reasons for which they are set up. Funds are usually set up in order for a profit to be gained by the managers of the fund as well as the investors/shareholders. Trusts are set up for a number of reasons, but the most common reason would be so that the assets can be maintained on behalf of the beneficiary, where the beneficiary can claim the assets once conditions set in the trust document. A fund is owned by its managers and is similar to holding shares in a firm, whereas a trust is not owned by any party (not even the beneficiary) and is treated as a separate legal entity.
Summary:
Trust vs Fund
• A trust is an agreement between two parties where one party’s assets are being transferred to another party, called a trust company that then maintains the assets and uses them for the benefit of a third party.
• A fund collects cash from a large number of smaller investors and invests pooled funds in profitable investments.
• Funds are usually set up in order for a profit to be gained by the managers of the fund as well as the investors/shareholders.
• Trusts are set up for a number of reasons, but the most common reason would be so that the assets can be maintained on behalf of a beneficiary, who can reap the benefits of the trust once conditions set in the trust document are met.