What Is a Unit Investment Trust?

What Is a Unit Investment Trust?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

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. Unlike mutual funds, a UIT portfolio is fixed and doesn’t undergo any managerial changes in response to the security market’s changes. Once the trust’s assets are selected, they’re locked in; they don’t change based on the rise and fall of market trends. When the period ends, the investment is dissolved, and proceeds are paid to the investors.

Related Questions

1. How does a Unit Investment Trust work?

A UIT buys a set of securities and packages them into units, which are then offered to investors. The securities remain unchanged until the trust’s termination date upon which it sells the securities, and the proceeds are distributed to the units’ owners.

2. What is the difference between a Mutual Fund and a Unit Investment Trust?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

While both are investment vehicles, mutual funds are actively managed with fund managers making investment decisions on a regular basis to achieve the fund’s objectives. On the other hand, UITs are passively managed with a fixed portfolio that stays the same for the life of the trust.

3. Are Unit Investment Trusts a good investment?

UITs can be a good investment for those who wish to invest in a diversified portfolio for a defined period without the ongoing management fees commonly associated with mutual funds. However, as with any investment, there’s a degree of risk, and it’s always advised to assess your financial goals and risk tolerance before investing.

4. How are Unit Investment Trusts taxed?

Most UITs generate dividends or interest that are passed on to the investors. These distributions are typically taxed as ordinary income. When the trust is dissolved, any capital gains from the sale of securities are usually subject to capital gains tax.

5. Can you lose money in a Unit Investment Trust?

Just like any other investments, UITs carry investment risk. Depending on the market performance of the securities in the trust and the time you sell your units, you could potentially lose money.