What is a UIT?
A unit investment trust (UIT) is a defined portfolio of securities. By defined, we mean that it is fixed and not managed. An investor who buys a unit of a UIT owns a pro rata portion of that portfolio and thus a pro rata portion of the interest or dividend income, if any, generated by that particular portfolio.
Unlike a mutual fund, which is professionally managed, a UIT is fixed upon the date of deposit as to what securities the trust owns. The investor knows at all times what securities make up the portfolio and because it is not managed can also be assured of a steady, non fluctuating income stream from fixed income portfolios.
In addition, also unlike a mutual fund, a UIT has a defined maturity date. The investor knows that he or she is buying an investment that is scheduled to return its principal value or its market value on a specific date. This assists the investor in structuring their investment to meet certain needs that they are planning for in the future.
The company that designs and constructs the UIT is known as the sponsor of the trust. The sponsor of the trust selects the securities to be placed in the trust and surveys those credits and companies on an ongoing basis. The trust however is not managed; all of the day to day operational aspects of the trust is the responsibility of the trustee. The trustee performs a variety of tasks including: safekeeping of the securities, income/dividend/principal distribution, and the origination of annual reports and other reporting requirements. The trustee also handles all tax reporting for the sponsor .
In addition to the trustee, the sponsor also selects an independent evaluator. The evaluator is charged with the responsibility of providing accurate, daily prices on all of the securities that make up the various trusts, as well as determining the trust's aggregate price. This allows the sponsor to provide accurate prices on all of their trusts to provide a stable functioning secondary market.
In addition to the evaluator and the trustee, the sponsor hires an independent legal counsel to provide legal opinions with regard to taxation of the trust and in order to insure compliance with the Securities and Exchange Commission's regulation of investment companies.
The main advantages of a unit investment trust are:
Defined Maturity
Defined Portfolio
Predictable Cash Flow
(equity trusts cannot assure predictable cash flow)
Daily Liquidity
No Redemption or Management Fees
(unit investment trusts may have initial sales charges)
Diversification
Monthly income
Convenience
Low initial investment
Reinvestment options
Professional Selection
