Tuesday, March 25, 2008

How Unit Investment Trusts Work?

Unit investment trusts (UITs) are baskets of stocks and/or bonds that are preselected by investment professionals to meet a specific goal (although there is no guarantee the UIT will meet its objectives).

Fixed portfolios. The investments within the unit trusts are fixed for a predetermined time, which means the investments do not change unless a company is bought or merged with another company or a company's financial condition becomes irreparable. This means you always know what you own.

Buying units.
Unit investment trusts are established for specified periods of time and liquidated to unit trust holders on their predetermined termination dates. A limited number of trust units are offered during presale purchase periods, which can last anywhere from one day to one year. During that time you can indicate an interest in buying units of the trust.

Units of a unit investment trust can be bought for as little as $1,000 ($500 for an IRA). Owning a unit of the trust means you own a proportional share of all the investments within the portfolio. It also means that, for a fraction of the cost, you can have diversified investments (including stocks and/or bonds) that would normally require $100,000 or more to purchase on their own.

Selling units.
You can sell your trust units back to the trust at any time for their net asset value (based on the value of the underlying securities) less any remaining deferred sales charges, which provides you with the liquidity you may need. Some unit investment trusts then resell those "returned" units to other investors.

Because the market value of the trust units fluctuates with changes in market conditions and the value of the underlying securities, shares of the unit trust may be worth more or less than their original price when sold.