Common Trust Fund Vs. Mutual Fund

Common trust funds (CTFs) are similar to mutual funds, in that they combine the assets of several individuals in a single, pooled investment to meet a shared goal. CTFs actually pre-date mutual funds, but banks offer them exclusively to private trust clients and they are governed by different regulations–some of them state-specific. Mutual funds are available to the general public, so they are better known and more widely owned.

CTFs Are Not “Trust Funds”

A common trust fund is not the same as a trust fund. Trusts are legal documents drawn up to specify how and when specific assets are to be used for or by the beneficiaries. CTFs represent collective investments owned by more than one individual, managed for them by a bank’s investment professionals. CTFs may or may not be used as part of a trust to benefit a family member, friend or a charity.


Both CTFs and mutual funds offer participants diversification because investments are spread over a variety of securities. Some funds invest primarily in common stocks of small, medium or large companies, seeking growth or value. Some invest primarily in income-producing securities, including bonds, preferred stocks or real estate investment trusts. Both CTFs and mutual funds keep track of each participant’s investments and returns, both calculate a net asset value per share and both make regular reports to shareholders.


CTFs charge shareholders a management fee only. In addition to management fees, mutual fund shareholders must pick up the tab for a variety of regulatory and administrative expenses a well as costs of marketing and distribution. If a common trust fund pays an independent sub-advisor, such as a firm specializing in foreign investments, those fees come out of the manager’s pocket and are not a fund expense. Their lower fee structure may give CTFs a performance edge.


CTFs often have high minimum investment requirements, in part because trust products were originally designed for high net worth investors. However, many trust companies allow members of the same family to aggregate their assets to meet their minimum requirements. Minimum initial investments in mutual funds vary. Some allow investors to start with as little as $25 a month, but others–particularly those mutual funds geared toward institutional investors–have minimums of 1 million or more dollars.


Participants in a CTF may only withdraw their money as of a valuation date stated in the fund’s policy. This may be as infrequent as monthly or quarterly. Mutual fund shareholders may withdraw at the close of business on any day the markets are open, although some have to pay an exit fee.

If a CTF or mutual fund has accumulated unpaid capital gains, new participants may be taxed when the distribution is made regardless of how recently they bought their shares.

Tax Status of Funds

CTFs held as part of personal accounts–personal trusts, estates, guardianships and accounts created under the Uniform Gifts to Minors Act–enjoy a tax-exempt status. However, in order to preserve that tax benefit, banks face additional regulations related to their fiduciary responsibilities to their clients. The result may be a regulatory tangle that can impact valuation and liquidity. All mutual fund distributions are taxable unless the funds are part of a tax-qualified plan.

Converting CTFs to Mutual Funds

Since December 31, 1995, federal law has allowed CTFs to be converted into mutual funds without creating a “taxable event” as securities are sold or transferred. Banks that convert a CTF to a mutual fund get more money for managing the fund. However, they would also face wider scrutiny of their performance. If the funds perform poorly over a period of time, the bank's reputation may be sullied.