Definition
A Unit Investment Trust (UIT) is a type of investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. UITs are bought and sold only by the trust company, not on the open market, compared to mutual funds.
Key Takeaways
- Unit Investment Trusts (UITs) are a fixed portfolio of selected stocks or bonds managed by an investment company. They are not actively traded, which minimizes management fees.
- Investors in UITs purchase units, similar to shares, which are typically sold at a one-time public offering, however, they are also bought and sold on the secondary market.
- Upon termination of the trust, investors are paid their portion of the trust’s net assets. This makes UITs somewhat similar to a time-limited mutual fund or an Exchange Traded Fund (ETF), but with a preset termination date.
Importance
A Unit Investment Trust (UIT) is an important financial term as it refers to a U.S. investment company offering a fixed (unmanaged) portfolio of stocks and bonds.
A UIT provides investors with a specific, focused investment strategy that is catered towards particular risk profiles or asset categories. Unlike other types of investment companies, a UIT’s portfolio is created at inception and remains undisturbed for a specific period of time, producing a generally stable and predictable income stream.
This makes UITs particularly attractive for long-term investing and for investors seeking diversification or yield at a comparatively lower risk. Therefore, understanding UITs is essential for creating a well-rounded, effective investment strategy.
Explanation
Unit Investment Trusts (UITs) serve a specific purpose in the field of investment, which is to provide investors with a secure and fixed portfolio of securities- like stocks and bonds. They are preferred for their fixed portfolio approach because it is considered relatively safer than other types of investment funds. UITs are established with a definite term in mind, at the end of which the trust assets are liquidated and the proceeds are handed over to the investors.
Offering a diversified portfolio, they primarily play the role of reducing the risk brought on by investing in a single security. The practical usage of Unit Investment Trusts extends to their ability to generate regular income for investors. Unlike mutual funds, UITs allow investors to invest in a variety of growth securities, which they otherwise might not be able to afford.
This feature makes them an excellent tool for small investors or those aiming to achieve diversification within a small budget. Additionally, since the portfolio doesn’t change once it’s set up, it also provides a more transparent investment solution ensuring that the investor knows exactly what securities his or her money is invested in. The transparency and fixed nature of UITs offer a predictable and low-risk investment tool for investors.
Examples of Unit Investment Trust
Invesco Unit Investment Trust: Invesco Ltd., an American independent investment management company, offers Unit Investment Trusts (UITs) with clearly defined objectives. These trusts are designed to provide investors with a way to own a fixed portfolio of securities such as stocks or bonds, that are professionally selected and monitored.
Guggenheim Investments Unit Investment Trusts: Guggenheim Investments is a financial services firm that provides investment solutions for financial advisors and their clients. They offer several Unit Investment Trusts with a wide range of strategies, including equity, fixed income, and multi-asset UITs.
First Trust Advisors Unit Investment Trust: First Trust Advisors L.P., a financial advisor firm, has a series of Unit Investment Trusts (UITs) that seek to provide investors with a diversified selection of domestic and international investment opportunities. These can include portfolios centered on sectors, themes, geographic regions, or specific index strategies.
FAQs on Unit Investment Trust
1. What is a Unit Investment Trust?
A Unit Investment Trust, or UIT, is a US financial company that buys or holds securities and allows investors to sell their share of these securities. It’s one of the three types of investment companies. The others being mutual funds and closed-end funds.
2. What is the structure of a UIT?
A UIT typically issues shares, or “units”, to investors that are redeemable. These units represent their holdings in the income and capital appreciation of the trust’s portfolio. This portfolio is typically set at the creation of the UIT and doesn’t change over time.
3. How does a UIT differ from mutual funds?
Unlike mutual funds, the investment portfolio of a UIT is fixed and won’t be actively managed. So, the securities in it won’t be sold or new ones bought based on market conditions. This makes UIT a more predictable and transparent type of investment.
4. What are the risks of investing in a UIT?
Since a UIT isn’t actively managed, its performance relies heavily on the original securities it holds. This means if these securities go down in value, so will the UIT. Additionally, a UIT has a definite termination date on which the investment securities are sold and the proceeds are paid to the investors. If at this time, the securities have gone down in value, you might receive less on your investment.
5. How do you buy shares of a UIT?
Shares of a UIT can be bought from brokers or financial advisors. Investors pay a one-time sales charge, which is usually already included in the price of the units. Returns on UITs are usually distributed to investors annually.
Related Entrepreneurship Terms
- Trustee
- Portfolio Securities
- Redemption
- Net Asset Value (NAV)
- Unmanaged Investment
Sources for More Information
- Investopedia: It’s a comprehensive online resource dedicated to finance and investment education.
- Morningstar: It’s a leading provider of independent investment research.
- U.S. Securities and Exchange Commission (SEC): The official website of the U.S regulator of the securities industry.
- Fidelity: It’s a multinational financial services corporation, offering detailed information about various investment products.
