If you have an investment portfolio or a 401(k), you’ve probably invested in a mutual fund. You may have also invested your savings in an ETF. Another similar option for investors who don’t want to buy individual securities is a unit investment trust (UIT). They’re similar to mutual funds, but they’re a more static investment, offering a fixed basket of securities for a fixed amount of time. Learn how UITs work and how to invest in them.
Consider working with a financial advisor as you pursue your investment strategy and tactics.
Unit Investment Trust Basics
A unit investment trust is a type of investment that offers a fixed portfolio of securities to an investor. Stocks and bonds generally comprise a UIT. Investors can be redeem them after a set period of time has passed. This is also known as the fund’s maturity date.
Unit investment trusts are one of the main types of investment companies. In this case, the term investment company refers to a company that pools investors’ money to purchase a group of stocks, bonds, and other securities. Other examples of investment companies are mutual funds and exchange traded funds (ETFs).
UITs are fixed investments, earning investors income in the form of dividends and capital appreciation. Dividends are the quarterly payments made from a company’s earnings to its shareholders, while capital appreciation is the profit earned when the price of the securities within the UIT increases over the life of the fund. Unit investment trusts require a small initial investment. That, paired with the fund’s low risk and high diversification factors, make them relatively desirable.
Unlike a mutual fund, in which fund managers can buy or sell securities at any time, UITs are not actively traded and have a set maturity date, usually 15 to 24 months from the outset of the fund, at which point the securities are purchased back from the investor and profits are earned, if any. Investors may also have the option to reinvest in the next round of UITs at this time.
Another difference between mutual funds and unit investment trusts? Unit investment trusts typically have a closed investment period, meaning that investors can only buy into the fund during a certain time period, after which the fund closes and doesn’t reopen until its maturity date. On the other hand, investors can invest in mutual funds at any time.
That’s why UITs have lower management fees than their mutual fund counterparts–because there’s a lot less management of the fund required. Remember the set end date, plus no buying and selling of securities during the life of the fund, which is common practice with mutual funds.
UITs vs. Mutual Funds
While unit investment trusts are similar to mutual funds, there are key differences between the two. Many mutual funds are open-ended, which means the fund manager can actively trade the fund – buying or selling stocks whenever he or she chooses. Securities within the fund can be bought and sold at any time. By contrast, unit investment trusts are close-ended, which means that the fund does’t do any trading.
It’s true that some mutual funds (like index funds) also take a passive investing approach, which means little to no trading by the mutual fund’s managers. But the other key difference here is that an investor in a UIT can’t do any trading, either. While an investor who owns shares of a mutual fund can sell at any time, an investor in a UIT is in it for the long haul. The stocks and bonds within the fund are held until its maturity, at which point the securities are bought back from the investor at their net asset value (NAV). In many ways, a UIT is a cross between a bond, a trust, and a mutual fund.
Mutual funds and UITs are similar in that they both allow an investor to own a diversified fund comprised of different types of securities, like stocks and bonds. This also means they both allow for greater portfolio diversification, always a good thing in the investment world. They also both utilize the practice of pooling investors’ money to purchase a grouping of securities. Another bonus? Both are regulated by the U.S. Securities and Exchange Commission (SEC).
So what’s a better investment? It really depends on the needs of the individual investor and their long-term goals. Mutual funds can offer a more actively-managed investment option (albeit with higher fees), while unit investment trusts offer a more hands-off approach and one with a set end date. Mutual funds, though, are more popular and investors use them more.
The Bottom Line
Both mutual funds and unit investment trusts are a great way to diversify your investment portfolio and reduce risk. The key difference is flexibility, for both the fund manager and the investor. While investors trade mutual funds whenever they want, unit investment trusts are held until their maturity date, at which time they are sold and the principal balance returned to the investor. There’s also no active trading of stock and bonds within a UIT, as the basket of securities is fixed for the life of the UIT.
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