Unit Investment Trust Vs. Mutual Fund

Although both are considered investment companies, UITs function differently than their mutual fund cousins.

Although both are considered investment companies, UITs function differently than their mutual fund cousins.

Unit investment trusts are in the same investment family as mutual funds. Both types of investments pool money from different buyers and use that money collectively to purchase securities, such as stocks or bonds. The main difference between the two types of investments lies in what happens after the portfolio is constructed.

Unit Investment Trust Structure

Unit investment trusts derive their name from the way they are structured. When you invest in a UIT, you buy units, rather than shares as you would with a mutual fund. The UIT then takes the money it raised from investors and buys securities.

You can buy either an equity UIT or a bond UIT. Historically, UITs have been bond investments, but the assets in equity UITs now exceed those in bond UITs. Each unitholder holds a certain percentage of the UIT. As investments within the UIT go up and down in value, so too do the prices of every unit.

Typically, UITs are only offered at one point in time. Once the money is raised, UITs generally close. Further, the portfolios that are purchased by UIT managers are usually static. This means that once you buy a UIT, you own the same investments until the UIT reaches a fixed maturity date or otherwise dissolves.

Mutual Fund Structure

Unlike UITs, mutual funds are continuously offered. Any day the market is open, you can buy shares of a mutual fund, although mutual fund shares are only priced once per day. If you want to sell your shares, you can sell them any day.

When you invest, your money goes into the fund and you are issued shares, which represent a percentage ownership in the overall fund. Mutual funds are typically actively managed, which means that securities within the fund are regularly bought and sold. Except in rare circumstances, mutual fund portfolios are constantly changing.

Differences Between Funds and UITs

Both mutual funds and UITs are designed to be long-term investments. However, most UITs have a termination or maturity date, whereas mutual funds typically exist in perpetuity.

Mutual funds can be more liquid than UITs, since you can always sell your mutual fund shares back to the issuing company. Some UIT companies may honor redemption requests, but you may have to find other investors willing to buy your units from you in the event you want to liquidate.

UITs often invest thematically, with static portfolios backing up that investment thesis. Mutual funds are more likely to be actively managed, with investment professionals always on the lookout for opportunities.

 

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

Photo Credits

  • Medioimages/Photodisc/Photodisc/Getty Images