A unit investment trust (UIT) is very similar to a mutual fund. Both UITs and mutual funds are redeemable securities that invest their customers’ money in hopes of maximizing returns. The difference between the two involves management.
UITs are redeemable securities that require their investors to perform transactions with the issuer. To purchase or sell shares, the investor will be transacting directly with the UIT’s issuer. Similar to mutual funds, there is generally no secondary market trading of this security.
When a UIT is created, it establishes an investment objective. Next, a professional money manager invests the assets of the trust. For example, if the UIT has $100,000 of assets and an investment objective of income, the professional goes to the market to find the best bonds available in the market. However, once the portfolio is set, there will be no changes.
UITs are a “set it and forget it” type of investment, unlike mutual funds. Mutual funds are actively managed and assess management fees to pay for the investment adviser’s services.
Comparatively, there are pros and cons regarding a UIT’s structure. These securities avoid management fees, which is a benefit. However, changes are never made to the UIT portfolio. This limitation could prove to be an issue, especially in a market with changing dynamics.
If a UIT investor is not happy with the security’s performance, they can simply request a redemption of their units. The issuer takes back the security and pays out an amount equal to the net asset value (NAV) of the units, similar to how it works with a mutual fund.
Bottom line - a UIT is basically a mutual fund without ongoing management.
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