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What Is a Common Trust Fund?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 13 September 2016
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A common trust fund is a fund composed of the pooled investments of several trusts that are controlled by a single trustee. The trustee in question is usually a bank or trust company, which takes all of the accounts and invests them as it sees fit. In this way, a common trust fund operates in much the same way as a mutual fund. It offers similar portfolio diversification and professional expertise to the beneficiaries while also avoiding some of the management costs and regulatory constraints associated with mutual funds.

Most investors seek to diversify their portfolios as much as possible so that they can take advantage of a variety of market opportunities. Diversification is also an excellent way to avoid substantial loss, as the bad luck of one or a few investment opportunities can be offset by the balance of the portfolio. Mutual funds, which take the money of multiple investors and spread it all over the market, are a common way of achieving this diversification. A common trust fund is another way to get this diversification and, as such, is a popular feature of retirement accounts.

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Normally, a trust is a group of assets endowed by someone known as a grantor that are intended for distribution to that person's beneficiaries. The administrator of the trust is someone entrusted by the grantor to follow the directions of the trust and distribute the assets to the grantor's beneficiaries. In a common trust fund, the bank or trust company acts as the trustee for multiple funds, with the investors acting as participants. Responsibility for investing the fund and seeing that the capital within grows—capital that is then shared by those who invested in the fund—falls upon the trustee.

It is important to note that a common trust fund is not one that is available to average investors on the stock market. Instead, it is usually a feature of specific retirement accounts as offered by banks or trust companies. The trustee has full financial control over these accounts, meaning that the bank or trust company has the authorization to make decisions on behalf of the fund's participants.

In that way, a trustee in a common trust fund acts the same as a mutual fund manager who oversees investments within the fund. The difference is that the management fees commonly assessed by mutual fund companies are significantly lowered, meaning a higher ratio of return for investors in the common fund. These funds are overseen by state and bank regulators but are not technically considered a security, which is why they are not on the open market.

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