A unit investment trust (UIT) is similar to a mutual fund in an important way: both are redeemable securities. That means investors buy and sell (redeem) shares directly with the issuer, and the price is based on the portfolio’s net asset value (NAV).
The key difference between a UIT and a mutual fund is management.
UITs are redeemable securities that require their investors to perform transactions with the issuer. To purchase or sell shares, the investor transacts 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 starts by establishing an investment objective. Next, a professional money manager selects the investments that will go into 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 bonds that fit that objective. Once the portfolio is set, it generally doesn’t change.
UITs are often described as a “set it and forget it” investment because there’s no ongoing portfolio management after the initial selection.
Mutual funds, by contrast, are typically actively managed and charge management fees to pay for the investment adviser’s services.
A UIT’s structure comes with trade-offs:
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’ NAV, similar to the redemption process for a mutual fund.
Bottom line: a UIT is similar to a mutual fund, but without ongoing management.
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