Unit Investment Trust (UIT)
What it is:
How it works (Example):
Also called unit trusts or fixed trusts, unit investment trusts are made up of a portfolio whose security assets are fixed and remain unchanged throughout the life of the trust. Consequently, they do not carry the management fees incurred by mutual funds since the constituents of the portfolio are not traded. For units purchased, however, there is an entrance fee levied on the buyer as well as an exit fee, should the holder choose to sell in the secondary market.
Similar to other investment companies, such as mutual funds, unit trusts are publicly sold in units or shares costing roughly $1000 each. The trusts, or companies themselves are either owned jointed among shareholders or serve as agents that grant partial ownership of the securities that make up the unit trust's portfolio.
The market value of a unit depends on the total value of the assets held in the unit trust. Since the securities held in a unit trust portfolio are generally income-generating in the form of dividends and interest payments, share-holders are entitled to periodic unit trust dividends.
To illustrate, suppose Bob purchases a share of a unit investment trust XYZ. The share costs him $1000 in addition to an entrance fee of $100. At the end of each quarter, Bob receives a dividend payment reflecting the dividends and interest earned by the securities underlying the unit trust. One day, Bob decides it is in his best interest to no longer hold his share of XYZ, so he sells it for a market price of $800 less an exit fee of $100 (Bob gets to keep $700 from the sale).
Why it Matters:
The unmanaged nature of a unit investment trust keeps it from incurring the management fees other investment companies might carry for adjustments made to the underlying portfolio. This means that the unit trust-holder gets to keep more of the money that they might make in dividends and the such. The unchanging nature of the fund, however, renders the risk and return of unit trusts considerably lower than some other investments. This makes unit trusts a better choice for long-term rather than short-term investors.