The Benefits and Risks of Investing in
Unit Investment Trusts

A Unit Investment Trust (UIT) is one of three types of investment companies (the other two being mututal funds and closed-end funds). A UIT offers a fixed (unmanaged) portfolio of securities to provide investors with the opportunity for income through dividends and/or capital gains through price appreciation. While the portfolio of a UIT may include several different types of securities, it is typically comprised of stocks and bonds. Unlike a mutual fund, a UIT is created for a set period of time and its underlying securities are not bought and sold. Each unit within a UIT is typically offered at $1,000 and is distributed to investors through a network of brokers.

How a Unit Investment Trust Works

Like a mutual fund, a Unit Investment Trust typically issues redeemable securities (units) that the company will buy back at the request of the investor at their current net asset vale (NAV). Like a closed-end fund, a UIT will usually offer a specific number of units under a one-time “public offering”. At the termination date, the UIT will dissolve, selling any portfolio securities it currently holds and paying out the proceeds to the investors.

Types of Unit Investment Trusts

Asset allocation portfolios are designed to meet specific investment objectives through investment in various asset classes

Sector portfolios focus on companies that operate in specific industries

Strategy portfolios look to outperform some benchmark or index by leveraging the historical behavior of specific securities

Income portfolios are designed to provide income to its investors with a secondary goal of capital appreciation

The Benefits of Investing in Unit Investment Trusts

One of the primary benefits of investing in a Unit Investment Trust is the instant diversification it offers, minimizing risk to its investors. The initial investment required may be as low as $1,000 and the investment offers high liquidity, in case the investor needs to sell at any time before termination.

The Risks Associated with Unit Investment Trusts

The main risk of investing in UITs is in the lack of management. While the company will go through an extensive research process in selecting securities, there is no ongoing buying or selling. While this strategy minimizes costs, it can make UIT investing less attractive. Additionally, UITs that invest in bonds are sensitive to interest rate changes.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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