Investment Options: Mutual Funds Vs Unit Investment Trusts

Although both Unit Investment Trusts (UITs) and Mutual fund are both considered investment companies, mutual funds function differently from their UIT cousins.

Mutual funds and UITs represent two of the three categories of investment companies. The third type is Closed-end companies. Although mutual funds and unit investment trusts have some common characteristics, the major distinctions come through in their individual investment strategies and how each gets managed.

Basics of Unit Investment Funds

UITs act in part like a closed-end company and a mutual fund combined. The typical UIT issues units or shares that investors can cash in at some point in a later date. This feature marks the similarity between UITs and mutual fund. When an investor/shareholder requests for redemption, the UIT Company buys back the investor’s shares at a price that is close to the share’s net-asset value at that time.

Basics of Mutual Fund

Similar to a UIT, mutual funds allocates redeemable units in the fund company. Whenever the investor in a mutual fund wishes to redeem her units/shares, the fund company is required to buy back the shares at the existing net-asset value and distribute any profits to the investor within a period not exceeding seven days.

The Differences between UIT and Mutual Funds

Although they have many similarities, UITs differ from mutual funds in especially considerable ways. A Unity Investment Trust put their money in a smaller diversified-portfolio of securities and doesn’t actively trade its portfolio. That is to say, the UIT may invest in only 10 securities and then exploits a “buy and hold” tactic for those 10 securities for the entire life of the UIT. Mutual Funds, on the other hand, offer highly diversified portfolios and then actively trade the portfolio’s securities. A typical mutual fund may have 30, 40, 50 or more even securities in a single portfolio. When a Unit Investment Trust gets established it establishes its own end date. For instance, a UIT may invest in 30-year bonds, and so once the bonds mature, the termination date for UIT is also reached. In addition, just like a closed-end company cousin, UIT makes an opening public offering. The UIT allocates a fixed number of units during their public offering. On the other hand, Mutual funds’ shares are created based on the demand, hence they virtually unlimited number of shares to offer for trade. What's more? A UIT neither utilizes the services of managers (or advisors) nor do they have a board of directors. But Mutual funds have a BOD and managers at their helm and seek the services of professional investment advisors.

Investment Offerings

With the Unit Investment Trusts, two basic types exist – the fixed-income UIT and equity UIT. Various investment categories fall under these two core types, but that is the furthest UIT diversity can go. In contrast, mutual funds may be compared only to the United Nations. They offer investment options in equity products, fixed-income products, and virtually everything from the big ore mining companies of the Pacific to tiny Latin American growth-companies.