Trust funds are undoubtedly one of the most high-profile terms in the financial world. Whether recommended by bank specialists or reported in financial news, their presence seems ubiquitous. However, the true meaning and operating model behind this seemingly familiar term may still be a mystery to many. Is it a product or a legal arrangement? Why does it attract the attention of millions of investors worldwide? To become a savvy investor, the primary task is to clarify the basic concepts and build a solid foundation of knowledge.
In the context of finance, the term “trust fund” is often used to refer to two related but distinct concepts. Failure to accurately distinguish between them can lead to misunderstandings on the investment journey. One refers to a financial product that pools money from the public for investment, commonly known as a “fund.” The other refers to a legally effective arrangement for property planning and inheritance, known as a “trust.” To grasp the full picture, it is necessary to examine the true nature of both.
When people talk about trust funds in an investment context, they are most often referring to a “unit trust,” also commonly known as a mutual fund. This is essentially a collective investment scheme. Its operating model is to pool the funds of many investors to form a large capital pool, which is then handed over to a team of professional fund managers to invest in a diversified portfolio of assets, which may include stocks, bonds, real estate, or other financial instruments, according to the fund’s preset investment objectives and strategies.
Investors participate by purchasing “units” or “shares” of the fund and become beneficiaries of the fund. The greatest appeal of this model is that it allows ordinary investors with a relatively low threshold to enjoy two major advantages that were previously only available to large institutions: diversified investment and professional management. It may be difficult for individual investors to purchase shares in dozens of different companies at the same time to diversify risk, but through a fund, even a small amount of money can immediately own a basket of investment targets.
Unlike a fund, which is an investment tool, a “trust” itself is a legally binding arrangement. According to trust law, a trust relationship refers to the owner of property (the settlor) transferring their property rights to a trustee for a specific purpose or for the benefit of a beneficiary, with the trustee managing and disposing of the property in accordance with the terms of the trust deed.
This legal structure includes three core roles:
One of the most crucial features of a trust is the independence of trust property. Once property is placed in a trust, it is legally separated from the settlor’s personal assets. This means that the trust property is, in principle, not affected by the settlor’s personal debts or legal disputes, thus achieving the powerful effects of asset protection and wealth inheritance. This is fundamentally different from simply purchasing an investment fund, which primarily seeks investment returns and does not have this legal asset segregation function. Trusts have a wide range of applications, from family wealth inheritance and estate planning to charitable causes.
For decades, trust funds have been a mainstream choice for individual investors worldwide. What is the charm that has allowed them to continuously attract everyone from financial novices to seasoned players across different markets and eras? The answer lies in their effective solution to the three major challenges commonly faced by individual investors: limited capital, lack of time, and the barrier of professional knowledge.
The popularity of trust funds is mainly due to their built-in advantages, which greatly lower the barrier for individuals to participate in professional investing.
First is professional investment management services. Investing is an activity that requires a significant amount of time and effort for research, from analyzing macroeconomic trends to examining the financial statements of a single company. The process is quite tedious. Trust funds delegate these complex tasks to a full-time team of professional fund managers. Investors can benefit from the knowledge and experience of these experts without having to manage their investments personally, saving a great deal of time and trouble.
Second is effective risk diversification. There is a famous saying in the investment world: “Don’t put all your eggs in one basket.” Trust funds are the best practice of this saying. Because funds pool a large amount of capital, fund managers can diversify investments across dozens or even hundreds of different securities, industries, or countries, thereby effectively reducing the “unsystematic risk” brought about by the poor performance of a single company or the decline of a specific industry. This is a risk management mechanism that is difficult for individual investors to replicate with limited funds.
Furthermore, it provides a convenient channel for access to global investment opportunities. For ordinary investors, directly investing in overseas markets may face regulatory restrictions, information asymmetry, or complex transaction processes. Trust funds break down these barriers, allowing investors to easily participate in markets around the world, from mature European and American stock markets to emerging market bonds with great potential, all through a one-stop fund allocation.
Finally, the lower investment threshold is also a major incentive. To build a diversified investment portfolio similar to that of a fund on your own, the total amount required could be substantial, even if you only buy the minimum trading unit of each security. Trust funds pool the capital of many people, allowing investors to indirectly hold this large investment portfolio with a relatively small amount of money, making professional investment more accessible.
Although trust funds offer many conveniences, enjoying professional services comes at a price. These fees will directly or indirectly erode your investment returns, so it is essential to have a clear understanding of their cost structure before investing. Fund fees can be roughly divided into two categories:
The first category is external fees, which are charged directly to investors at the time of the transaction. The most common of these is the subscription fee. When you purchase a fund, the sales channel (such as a bank or fund platform) will charge a fee based on a certain percentage of the subscription amount. The fee rate for equity funds is typically around 3%, while for bond funds it is about 1.5%, although various channels often offer discounts.
The second category is the more hidden internal fees. These fees are not paid additionally by the investor but are deducted directly from the fund’s total assets on a daily basis. This means that the Net Asset Value (NAV) of the fund that you see has already had these fees deducted. These fees mainly include:
Understanding these fees is crucial because market fluctuations are unpredictable, but these fees are a certain cost. When choosing a fund, in addition to focusing on its investment strategy and past performance, you should also consider the fee rate.
In the past, traditional trust funds (unit trusts) were the only choice for retail investors. However, with financial market innovation, a new instrument called an “Exchange-Traded Fund” (ETF) has rapidly emerged and become a mainstream force in today’s market. For modern investors, choosing between traditional trust funds and ETFs has become a required lesson. To make a wise choice, one must first understand their key differences in core mechanics.
The most intuitive difference between the two lies in the place and method of trading. ETFs are listed and traded on stock exchanges, just like stocks. This means that during the stock market’s opening hours, investors can buy and sell at any time through their securities accounts, and their prices will fluctuate in real-time like stocks. This trading model gives ETFs extremely high intraday liquidity and flexibility, allowing investors to quickly adjust their positions based on market changes.
In contrast, traditional trust funds are subscribed to and redeemed through channels such as banks and fund platforms. Their transaction price does not change in real-time but is based on the “Net Asset Value (NAV)” calculated after the fund closes each day. Regardless of what time of day you place an order, the final transaction will be at that day’s single closing NAV. Therefore, its buying and selling process is relatively long, and it usually takes several working days for the funds to be settled, making its liquidity and flexibility naturally inferior to ETFs.
Behind the difference in trading methods lies a fundamental difference in their investment philosophies. The vast majority of traditional trust funds use active management. Their core goal is for the fund manager to strive to create returns that exceed the market average (i.e., the benchmark index) through in-depth research, active stock selection, and market timing. This model gives the fund manager greater decision-making power, but the changes in their portfolio are more frequent, transparency is relatively low, and because a lot of research resources need to be invested, their management fees are also higher.
On the other hand, the vast majority of ETFs in the market use passive management. They do not aim to “beat the market,” but rather to “replicate the market,” that is, to accurately track a specific market index, such as the S&P 500 in the United States or the 0050 index in Taiwan. Since their investment portfolio is completely based on the constituent stocks of the index, the operation is relatively simple, and the holdings are extremely transparent (usually published daily), so their management fees are much lower than those of actively managed funds.
Related recommendation: What is the S&P 500 Index? How to grasp the pulse of the US stock market?
To give you a clearer understanding of the differences between the two, here is a quick comparison table:
| Feature | Unit Trust Fund | ETF |
| Trading Method | Traded once a day at the closing net asset value through channels like banks and fund platforms | Listed on a stock exchange, can be bought and sold at any time during trading hours |
| Trading Cost | Higher subscription fees and internal fees like management fees | Transaction fees are the same as for stocks, with generally lower internal management fees |
| Management Style | Mostly actively managed, aiming to outperform the market | Mostly passively managed, aiming to track an index’s performance |
| Transparency | Holdings are typically disclosed quarterly or semi-annually, lower transparency | Holdings are usually disclosed daily, high transparency |
| Liquidity | Lower, as subscriptions and redemptions take several business days to complete | High, can be converted to cash at any time during trading hours |
| Suitable For | Investors who prefer to delegate investment decisions to experts and seek returns that beat the market | Investors who prefer low costs, high transparency, and wish to obtain market-average returns |
From the “unit trust fund” as an investment tool to the “trust” as a legal arrangement, clearly distinguishing between the two is a key first step in financial planning. We understand that the core advantage of an investment fund is that it provides individual investors with a convenient way to access professional management, risk diversification, and global deployment.
However, no investment tool is perfect. We must also face the various hidden fees, as these costs are a definite factor affecting long-term returns. At the same time, with ETFs having become mainstream in the market today, a deep understanding of their fundamental differences from traditional funds in terms of trading models, cost structures, and management philosophies will help you choose the most suitable tool based on your own investment goals and risk appetite.
Mastering this basic knowledge is not the end of financial planning, but a crucial starting point. It establishes a solid framework for you to analyze and judge with more confidence when facing various opportunities and challenges in the future market. When you are ready to put your knowledge into practice, a trustworthy platform will be your indispensable partner. The purpose of CashbackIsland is not only to save you costs on every transaction but also to walk alongside you on your long financial journey and grow with you by providing professional-grade calculation tools and real-time market intelligence updates.
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The two are fundamentally different. A “trust” is a legally effective property management arrangement, where the core is that the settlor entrusts property to a trustee to manage for the benefit of a specific beneficiary, with the main purpose being asset protection and wealth inheritance. A “fund” is a collective investment vehicle that pools the funds of many people to be invested in assets such as stocks and bonds by professional managers, with the main goal being to obtain investment returns.
No. Investors purchase “shares” of the fund, not direct ownership of the stocks or bonds held by the fund. All investment decisions, such as what to buy and sell and when, are made by the professional fund manager team. Investors do not have direct control over the fund’s specific investment portfolio.
“Financial derivatives trading involves high risks and may result in the loss of funds. The content of this article is for informational purposes only and does not constitute any investment advice. Please make decisions cautiously based on your personal financial situation. CashbackIsland assumes no responsibility for any trading derivatives.”
