A unit investment trust (UIT) is similar to a mutual fund. Both UITs and mutual funds are redeemable securities that pool investors’ money and invest it with the goal of earning a return. The key difference is how the portfolio is managed after it’s created.
UITs are redeemable securities that require investors to transact directly with the issuer. When you buy or sell units, you do it through the UIT’s issuer rather than through a trading market. Like mutual funds, UITs generally don’t trade in a secondary market.
When a UIT is created, it sets an investment objective. Then a professional money manager selects the investments that will make up the trust’s portfolio. For example, if the UIT has $100,000 in assets and an objective of income, the manager might purchase bonds that fit that goal. Once the portfolio is set, it doesn’t change.
That fixed portfolio is what makes UITs a “set it and forget it” type of investment. Mutual funds, by contrast, are actively managed and charge management fees to pay for the investment adviser’s ongoing services.
Comparatively, there are pros and cons to a UIT’s structure:
If a UIT investor isn’t satisfied with performance, they can request redemption of their units. The issuer takes back the units and pays the investor an amount equal to the units’ net asset value (NAV), similar to how mutual fund redemptions work.
Bottom line: a UIT is basically a mutual fund without ongoing management.
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