Unit Investment Trust - Explained
What is a Unit Investment Trust?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Unit Investment Trust?
A unit investment trust (UIT) refers to an investment company that offers investors a fixed portfolio that have a definite life or specified life-span. A UIT can be an exchange-traded mutual fund or closed-end fund that offers a diversified portfolio to investors for a stipulated time. In exchange for investing in the fixed portfolio, investors receive dividends or capital appreciation.
How Does a Unit Investment Trust Work?
Generally, the fixed portfolio offered to investors by a unit of investment (UIT) comprises of stocks and bonds. With the fixed or diversified portfolio, investors with low capital can make their investment. This is because investing in these fixed and diversified portfolios require a little investment for a start. A UIT is a grantor trust, it could also be a regulated (registered) investment corporation (RIC). Investment advisors sell UITs to investors and they can redeem the units at the specified time.
How Investments Are Sold
Investment advisors sell UITs to investors. At the set time, investors can redeem the units to the trust or fund at a Net Asset Value (NAV). The NAV at which the units are redeemed is calculated as; NAV= total value of the portfolio / the number of shares or units outstanding Units can be redeemed by investors directly or with the help of an investment advisor. NAV is calculated at every trading day. However, investors sell closed-end funds in the secondary market at the current market price, they are not redeemable.
The Differences Between UITs and Mutual Funds
Mutual funds are different from unit investment trust (UIT). Mutual funds seek to outperform the current investment benchmark in the market, to achieve this goal, portfolio managers can buy and sell the securities that are in the portfolio. Also, mutual funds are open-ended funds while UITs are close-ended funds with a fixed portfolio that had a definite life. UITs pay dividends or interest on units purchased until stocks and bonds in the portfolio are sold at the specified date.