Unit Investment Trust Fund

Unit Investment Trust Definition, Fees, Example, Performance Rating, Accounting, Companies, Security Bank

How does a unit investment trust work?
Is unit investment trust good or bad? What are its pros and cons? So you might have heard about the words ‘Unit Investment Trust’ once or twice before, and you wonder what it is and all what it entails. Well, this piece will add to your knowledge, as you will know more things about Unit Investment Trust.

Now, in U.S financial law, a Unit Investment Trust (also known as an UIT) is actually a mutual fund that is exchange-traded offering a range of unmanaged fixed portfolio of securities that are having a definite life. You may now wonder if it’s different from open-end and closed-end investment companies.

How unit investment trust fund works
Well, unlike open-end and closed-end investment companies, a Unit Investment Trust has no board of directors. And actually, a Unit Investment Trust is registered with the Securities and Exchange Commission (that is under the Investment Company Act of 1940). It is also classified as an investment company. And, it is worthy of being mentioned that Unit Investment Trusts are assembled by a sponsor and sold through brokerage firms to investors.



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We need to know this. A Unit Investment Trust may contain one of several different types of securities. In fact, the two main types are stock (equity) trusts and also bond (fix-income) trusts.

Benefits of unit investment trust
Now, unlike a mutual fund, a Unit Investment Trust is created for a specific length of time. And also, it is a fixed portfolio. This simply means that the Unit Investment Trust’s securities will not be sold or new ones bough (except, of course, in certain limited situations). And one of those situations is when, for instance, a company is filling for bankruptcy or even the sale is required due to a merger.

Stock Trusts

Let us talk about Stock Trusts for a while. You see, stock trusts are generally designed to provide capital appreciation and/or dividend income. Not only that, they are known to usually issue as many units (that is, shares) as necessary for a set period of time (before their primary offering closes).

We need know that equity trusts actually have a set termination date (on which the trust liquidates and whose net asset value is distributed as proceeds to the unit holders). The unit holders, as it is being said, possibly have access to a variety of unit trust property investment routes to reinvest their principals.

Bond Trusts

Really, bond trusts issue a set number of units. And then, the trust’s primary offering period is closed when they are all sold to investor. And in case you never know, bond trusts pay monthly income (often in relatively consistent amounts) until the first bond in the trust is called (or ‘matures’).

Now when this occurs, the funds from the redemption are then distributed to the clients via what is known as a pro-rata return of principal. Then, the trust continues paying the new monthly income amount until the next bond is redeemed. And yes, this continues until all the bonds are said to have been liquidated out of the trust. But truly, it is being said that bond trusts are generally appropriate for clients that are seeking current income (and also stability of principal)

Unit Investment Trust: Legal Status And Document

Actually, a Unit Investment Trust may be constituted as either a regulated investment company (that is RIC) or even a grantor trust.

You see, a RIC is a partnership, a trust and a corporation which many investors are known to have common investment and voting rights. However, they do not have direct interest in investments of the investments fund or company. And on the other hand, a grantor trust, gives a calculated stake in ownership of the available securities.

A Unit Investment Trust is said to be created by a document known as the Trust Indenture. The said document is drafted by the Sponsor of the fund, and names the Trustee and the Evaluator. And in case you don’t know, by US law, the Sponsor and the Trustee may not be the same.

Actually, it is the sponsor that screens and stamps the types of security to be included in the fund. And, it is known that the trustee do such things as keeping the securities, maintains unit holder records, and even performs all accounting and even tax reporting for the portfolio.

Unit Investment Trust: Tax Perspective

Unit Investment Trusts (UITs) from a tax perspective, offer satisfactory protection from the taxes that capital gains attract which is expected from a mutual fund. Now, because individual UIT’s are collated and bought for particular time frames, the cost basis is known to consist of the initial purchase price of the securities held in the trust.

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