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.
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 secondary market. Like mutual funds, UITs generally don’t trade on an exchange.
When a UIT is created, it sets an investment objective. Then a professional money manager selects the investments that will go into the trust. 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 selected, it stays fixed - the holdings generally aren’t changed.
That’s why UITs are often described as “set it and forget it” investments. Mutual funds, by contrast, are actively managed and charge management fees to pay for the investment adviser’s ongoing services.
Comparatively, a UIT’s structure has both advantages and disadvantages:
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 the redemption process for a mutual fund.
Bottom line - a UIT is basically a mutual fund without ongoing management.
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