A unit investment trust, or UIT, is similar to a mutual fund in that it’s a type of investment company that can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units. In fact, UITs belong to the same category as mutual funds and closed-end funds, in that they pool money together from different investors.
Similarly, unit investment trusts are designed to provide capital appreciation and/or dividend income, although without active trading of the securities in the portfolio. Unit investment trusts can offer some advantages to investors compared to mutual funds or exchange-traded funds (ETFs). There are, however, some potential downsides that could make them less attractive than other types of pooled investments.
Unit Investment Trust (UIT) Explained Clearly
A unit investment trust is a type of investment company that issues and invests in securities. The other two types of investment companies are open-end funds (i.e. mutual funds) and closed-end funds.
Similar to a closed-end fund, a UIT raises money from multiple investors, typically through an Initial Public Offering, or IPO. Each investor holds a unit in the trust that represents an ownership share and allows them to stake a claim to any capital appreciation or dividend income the trust generates. This type of trust can be established as a grantor trust or a regulated investment corporation.
Once the portfolio manager of a unit investment trust chooses which securities to invest in, the investment focus usually doesn’t change. That means there is typically no active investing management in terms of trading the underlying assets. The investments that a UIT chooses depend on its overall strategy and objectives. So, the risk and return profile of unit investment trusts can vary from one to another, based on the underlying holdings.
When a UIT matures, investors can do one of three things:
• Wait for the trust to liquidate its portfolio and receive their share of the proceeds
• Roll the investment over to a new UIT
• Receive a like-kind distribution of stock from the trust’s underlying investments
It’s important to keep in mind that UITs are not guaranteed investments. So, it’s possible that returns could be lower than expected or even negative if the trust fails to meet its objectives.
UIT Advantages and Disadvantages
Like any investment UITs have their advantages and disadvantages. As for advantages, investors may like that UITs offer a relatively easy way to diversify their portfolios with a single investment. They’re relatively easy to understand, too, and offer a degree of transparency into their holdings, so that investors can make better decisions relating to their investing strategy.
As for disadvantages? Perhaps the most obvious is that UITs are more or less fixed investments that do not change their investment mixes in an effort to adjust to the whims of the market. Some investors may prefer a more active approach to management in an effort to increase their returns.
Types of Unit Investment Trusts
Unit investment trusts can invest in a variety of different securities, but they tend to concentrate holdings in stocks and bonds. UITs generally come in one of two forms: Stock trusts and bond trusts.
These assets are held in the trust for a set time period until the trust is dissolved. A typical holding period would be anywhere from 15 months to two years, though some UITs may have an end date that’s farther in the future.
Investors can sell their holdings back to the issuing company at any time, but they can’t trade UIT shares as they would shares of a mutual fund.
đź’ˇ Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
UIT vs. Mutual Fund
UITs differ from most mutual funds several ways, chiefly in that they sell a fixed number of shares or units when the UIT is first opened; and the trust has a set maturity date when the UIT is dissolved and investors can redeem their units.
As noted, a mutual fund is a company that pools money from investors and invests them in securities. There are many different types of mutual funds, including but not limited to bond funds, stock funds, blended funds, target-date funds, and index funds. Some mutual funds can be actively managed while index funds follow a passive investing strategy.
At first glance, a UIT and a mutual fund might seem like the same thing since they fall under the same investment company umbrella. And while they do have some features in common, there are other things that distinguish the two.
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How Are UITs and Mutual Funds Similar?
UITs and mutual funds share common ground when it comes to diversification, regulation, and how they pass on capital gains or dividends to investors. A capital gain represents a gain between the price you initially paid for an investment and the price you receive when you sell it. A dividend is a percentage of an investment’s profits that are paid out to investors.
Since UITs and mutual funds are both types of investment companies, they’re subject to SEC regulation. This means they’re required to meet regular reporting requirements. While this can help to minimize the potential for fraud, investors are still encouraged to read each fund’s prospectus to ensure they understand what the fund invests in.
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What Are the Differences Between UITs and Mutual Funds?
The biggest differences between UITs and mutual funds concerns their structure and management. A UIT has a set beginning when shares are issued, and an end date when it matures — while an open-end mutual fund typically allows investors to continually buy and sell shares. Additionally, a unit investment trust issues a certain number of units when the trust is created while mutual funds can issue new shares periodically.
With UITs, the underlying investments remain largely or entirely the same until they mature. Mutual funds, on the other hand, can buy and sell underlying assets as needed to stay aligned with the fund’s objectives. So, mutual funds can be more adaptable if an underlying investment doesn’t perform as expected.
How to Invest in UITs
If you’re interested in investing with a unit investment trust, it’s possible to buy them directly from the issuer. UITs can also trade on an exchange, so you could purchase them through an online brokerage account.
Before buying a unit investment trust, however, there are a few things to consider. Specifically, look at the following when comparing UITs:
• Duration of the UIT
• Minimum investment requirement
• Underlying investments
• Investment strategy and objectives
• Fees
Also, consider the investment risks. Again, there’s no guarantee that a unit investment trust will perform as expected. And since the trust investments are fixed, your returns (or losses) more or less hinge on whether those investments do well.
It’s also important to think about how well the underlying investments match up with the other investments in your portfolio. If you’re already heavily concentrated in equities, for example, it may not make sense to choose an equity UIT since that could increase your exposure to some of the same companies. A bond UIT, on the other hand, might help to balance out your asset allocation.
Investment Costs
Don’t forget that investments often have associated costs, and they can come in a variety of forms. For instance, investors may be on the hook for broker fees, trading fees, management fees, and more. The specifics will depend on the individual investment, but investors should do some homework to see what potential investment fees they’re up against.
Unexpected Taxes
Taxes often catch investors by surprise, too. Be sure to review what types of taxes you might be on the hook for – with investments, it’s generally either income taxes or capital gains taxes – and plan accordingly.
Are UITs a Good Investment?
Whether a unit investment trust is a good investment for you personally can depend on what you need and expect a pooled investment to do for you.
If you’re an active trader, for example, then a UIT likely wouldn’t be a good fit. On the other hand, if you tend to take the longer view when investing or you prefer a buy-and-hold approach, you may find a unit investment trust fits well in your investment portfolio.
While you could benefit from capital gains distributions and dividends, keep in mind that unit investment trusts offer less flexibility than mutual funds or ETFs. Dividends, for example, can’t be reinvested the way they could with a mutual fund or index fund.
And, as discussed, investment fees are another important consideration when investing in a UIT. Since investment costs can reduce total return amounts over time, it’s important to understand all the costs associated with buying units and redeeming them when the trust matures.
Should You Consider Investing in a Unit Investment Trust?
Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy.
If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust. You also might want to explore alternatives to trusts or funds, like cryptocurrency or investing in IPOs.
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The Takeaway
A unit investment trust, or UIT, are investment companies that are, in many ways, similar to a mutual fund. They can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units.
Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy. If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Are fixed unit investment trusts redeemable?
Unit investment trusts do issue redeemable shares or units, much like a mutual fund. As such, the UIT is able to purchase shares or units back from an investor at an appropriate valuation.
What is the difference between unit trust and investment trust?
A unit trust is a sort of investment fund that allows investors to pool their money for investment purposes. An investment trust is a company or entity that operates an investment fund.
Are UITs actively managed?
UITs are not actively managed, and have fixed investment holdings. Accordingly, investments are purchased at the onset, and held until the UIT matures.
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