Unit investment trusts and mutual funds represent two of the three types of investment companies. Closed-end companies represent the third type. Although unit investment trusts and mutual funds share some characteristics, the major differences come through in how each get managed and their individual investment strategies. You know, kind of the way you and the better half may have different meanings for the word “savings”.
Unit investment trusts act in part like a mutual fund and a closed-end company combined. The typical UIT issues shares or units that investors can redeem at some point in the future. This feature is similar to features found in a mutual fund. When an investor makes a redemption request, the UIT buys back the investors units at a price that’s close to the unit’s net-asset value.
Mutual Fund Basics
Like a UIT, mutual funds issue redeemable shares in the fund company. Should an investor in a mutual fund desire to redeem her shares, the fund must buy back the shares at the current net-asset value and distribute any proceeds to the investor within seven days.
Although they share many similarities, unit investment trusts differ from mutual funds in very significant ways. A UIT invests in a smaller diversified portfolio of securities and does not actively trade its portfolio. In other words, the UIT might invest in 10 securities and use a “buy and hold” strategy for those ten securities for the life of the UIT. Mutual Funds offer very diverse portfolios and actively trade the securities in the portfolio. A mutual fund might have 20, 30, 40 or more securities in one portfolio. When a UIT gets established it also establishes its own termination date. For example, a UIT has invested in 30-year bonds, but once the bonds mature, the UIT terminates. Additionally, A UIT makes an initial public offering just like its closed-end company counterpart. The UIT issues a fixed number of shares during this public offering. Mutual funds create shares based on demand, giving them almost an unlimited number of shares available to trade. Also, a UIT does not have a board of directors or utilize the services of an investment advisor or investment managers. Mutual funds have professional investment advisors and managers sitting at their helm.
Two basic types of UITs exist -- the equity UIT and the fixed-income UIT. Various categories of investments fall under these two basic types, but that’s really all the diversity you get. On the other hand, mutual funds are more like the United Nations. Mutual funds offer investment in fixed-income products, equity products and everything from small Latin American growth companies to metal ore mining companies in the Pacific Rim.
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