Unit investment trust (UIT)

Unit investment trust (UIT)

A financial investment firm, unit investment trust (UIT), provides trust units as a set securities portfolio. UITs are an alternative to mutual or closed-end funds because they don’t have the same advantages of low expenses, dependability, tax protection, and reasonably foreseeable gains. 

Of course, certain drawbacks exist, such as a lack of adaptability and a potential profit ceiling because dividends still need to be reinvested. But for the conservative investor seeking to diversify his portfolio, UITs can be wise if you’re close to retirement or simply trying to stretch your dollar. 

What is a unit investment trust (UIT)? 

A unit investment trust (UIT) is an investment firm that provides investors for a certain length of time with redeemable units of a predetermined portfolio, often made up of stocks and bonds. Unit investment trusts are fixed investments, so once a portfolio of stocks or bonds is set, it rarely changes. As these portfolios are not regularly traded, you can see and comprehend your holdings more clearly. 

Understanding the unit investment trust (UIT) 

The purpose of UITs is to assist investors by providing them with assets for trading and then redeeming the units to the trust. This process reduces risk and makes gaining interest and principal on bets possible. Companies that invest in unit investment trusts are registered and have a termination date. When trusts are dissolved, the income is dispersed to unitholders or reinvested in another trust.  

UITs raise money by selling “units,” or shares, to investors in a single initial public offering. Each unit represents a piece of the trust’s ownership and entitles the owner to a percentage of the income and capital gains generated by the investments, often stocks or bonds. The trust’s investment return is based on the performance of UITs. These investments are frequently fixed, with a UIT holding the securities it owns for the fund’s life. 

UITs plan to remain active for the fund’s duration, but shareholders can sell their shares if their investing goals change. A fixed unit investment trust buys a selection of securities and holds them largely unchanged for the duration of the UIT. Investors in UITs are, therefore, frequently aware of their endowments. 

Key features of UIT 

The following are the key features of UIT: 

  • UITs are subject to SEC regulations and are registered with the SEC. 
  • A UIT has no corporate executives, board of directors, or financial advisors to offer assistance. 
  • A UIT conducts a single public offering of just a specific number of units, much like a closed-end fund. 
  • A UIT will typically issue redeemable units, meaning that the UIT will buy back an investor’s units for a price roughly equivalent to their projected net asset value. 
  • On a certain date, an unit investment trust will end and dissolve. After a UIT expires, the investors receive the proceeds from selling unsold assets from the investment portfolio. 

 

Types of UIT 

The following are the types of UITs: 

  • Stock trusts 

By making shares available during the offering period, which is a predetermined time frame, stock trusts conduct initial public offerings (IPOs). Investor funds are now gathered, and claims are presented. Generally speaking, the goals of stock trusts are to provide capital growth, dividend income, or both. Trusts seeking income may make payments monthly, quarterly, or semiannually. UITs may invest in domestic or international stocks or a mix of both. 

  • Bond trusts 

Historically, bond UITs have been more popular than stock UITs. Bond UITs are frequently purchased by investors looking for reliable, consistent sources of income. Until the bonds start to maturing, payments are made. Investors receive assets as each bond matures. Several other types of bond UITs are available, including those focusing on domestic corporate bonds, foreign corporate bonds, domestic government bonds, foreign government bonds, or a combination of subjects. 

Example of a UIT 

To better understand UITs, consider the following example. On March 15, 2018, Guggenheim’s Global 100 dividend strategy portfolio series 14 was established to generate dividend income. 100 different positions were represented by it, with 45.16% invested in large-cap equities, 26.94% in mid-caps, and 27.90% in small-cap companies.  

Most securities were invested in American stocks, with the remainder spread across numerous other nations. Several sectors are also reflected in allocation. Each business it owned made for about 1% of the portfolio. The necessary maturity date for this UIT, which was produced, was June 17, 2019.  

Guggenheim has continuously provided new UIT products since the maturity date of this UIT. A good example is the September 9th, 2020, creation of the Global 100 Dividend Strategies Portfolio Series 24, with a mandatory maturity date of December 17th, 2021. 

Frequently Asked Questions

Fixed-income UIT investors typically receive a consistent income, typically monthly. In contrast, holders of direct bonds earn interest on their investments every half-year or year. Equity UIT investors can receive monthly, quarterly, or semiannual dividend payments or take advantage of any long-term financial gains the trust may generate after it is dissolved. 

There are costs and fees for all UITs. Given that they impact your investment’s return, these expenditures, like other investing expenses, they are crucial to comprehend. The costs associated with UITs are split into costs related to distribution and expenses associated with operation. 

Similar to how open-ended funds can be bought and sold directly through fund firms, UIT’s units can be bought and sold directly from the investment company that issued them. 

Since mutual funds are open-ended, the portfolio manager can buy and sell securities. Until a predetermined end date, when the bonds are sold and the principal is refunded to the owners, a UIT maintains the portfolio and pays interest. 

A UIT should be bought by an investor who wants to acquire and hold a portfolio of bonds while generating interest. UITs can be a good option for a variety of investors. Still, they may be particularly well-suited for those looking to diversify their portfolios and those with limited investment resources. 

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    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

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