Liquidity in Unit Trusts

One of the disadvantages of these types of investment fund are that, if the stock market crashes and lots more people sell their units in the fund than buy, the investment manager will have to sell a significant portion of the underlying assets. Whether you can easily sell or buy something is called its Liquidity. For items like stocks and shares, generally isn’t a problem, as they are generally very easy to sell on the stock market. But when the underlying assets are something harder to sell, like property, selling these can take a long time, and being forced to sell them in a hurry may mean a lower price is obtained than the property is worth.

After the Brexit vote, many investors tried to sell shares in property funds which caused them a liquidity crisis, that is, they didn’t have enough cash to give everyone their money back (see here), and many funds stopped allowing people to sell their investments, or forced investors to take a much lower price than the shares were worth to discourage sales. This is less of an issue with closed ended investments such as Investment Trusts, which I will talk about later.

(AAG)