Unit Investment Trust/ Closed-Ended Funds
Introduction and Definition
Unit investment trust is an investment company which purchases andholds fixed and redeemable portfolio of stocks, bonds or othersecurities for a specified period of time (Steinberg et al 39). It iscommonly abbreviated as UIT. Closed-ended fund is an investmentcompany which just like UIT, issue fixed portfolio of securities thatare unredeemable (Anderson, Seth and Gustav 56). UIT’s fixed naturemeans that when the public offer for sale of securities is closed, nofurther transactions take place until the termination date is reachedusually 1-2 years for equity trusts and 20 years for bonds. The maintypes of unit trusts are fixed income (bonds) and equity (stocks)trusts. Bonds can be taxable such as corporate bonds or tax-exemptsuch as municipal bonds. Equity trusts are either domestic orinternational trusts including common and preferred stocks,government securities and mortgage stocks.
Unit investment trusts and closed ended funds originated in theUnited States during the late 1890s and early 1920s (Anderson, Sethand Gustav 76). The earliest closed ended trust was created in1893called the Boston Personal Property Trust. Out of an investor’sneed to accumulate public ownership in his respective company the1907 Alexander Fund was created and was the stepping stone to moderntrust funds. The other earliest trusts were Massachusetts Investors’Trust (1924) and State Street Investors’ Trust (1924) andWellington Fund (1928). The initial trusts were either fixed orsemi-fixed (Laopodis 32).
The popularity of the trust funds grew exponentially through 1930sand early 1940s where the growth slowed due to World War II and laterrecovered and expanded to the current trust funds. Major regulationswere derived from the Securities Act and Investment Company Act of1933 and 1940 respectively (Laopodis 34).
Unit investment trusts and closed ended funds brought many changes inthe market which was dominated by Managed Investment Companies whichwere created by investment bankers, charged high fees and had littlediversification (Steinberg et al 39). Some of the major developmentsthat UITs and closed ended funds brought include: unmanaged platformof investment which allowed investors diversified securities andliquidity of their investments at a fair price fixed portfolios withdefinite termination periods reedemability of the invested unitssecondary trading of sold securities by sponsors in small stockexchanges and regulation measures through enactment of The 1933Securities Act and 1940 Investment Company Act (Bottazzi et al 34).
Comparing Unit Investment Trusts and Closed-ended Funds
UITs and closed ended funds have a number of advantages to investors.UITs and closed ended funds provide a platform where people caninvest their money securely and reap high returns on initialprincipal capital (Bottazzi et al 34). Investing in unit investmenttrusts is affordable especially the equity trusts since they aremanaged passively and have no board of directors of corporateofficers hence accruing fewer charges and expenses. UITs and closedended funds offer diversity of products by investing in manysecurities and this allows individual investors to earn interest froma pool of investments (Bottazzi et al 54). These trusts are alsoshort-lived and offer liquidity of the principal invested thus savingthe investors from the market vagaries and uncertainties.
Comparing the Effects of Unit Investment Trusts and Closed-endedFunds on us
Unit investment trusts and closed ended funds have many effects onall of us. IUTs and closed ended funds offer a perfect investmentground for our surplus money with a higher degree of security andassurance of good returns (Bottazzi et al 34). They offercompetition to other trust funds such as closed end funds, mutualfunds and other investment companies opening ground for affordableand diversified investment avenues for potential investors. Learningabout the operations of UITs and closed ended funds provide necessaryinformation and exposure to various stocks traded in the marketfostering good financial and investments decisions (Bottazzi et al37).
Unit investment trusts are investments companies which deal withfixed and redeemable securities and operate for a specified period oftime. Closed-ended fund is an investment company which just like UITissue fixed portfolio of securities that are unredeemable. UITs andclosed ended funds are popular with investors due to their highliquidity, diversification and affordability (Laopodis 54).
Anderson, Seth, and V. R. Gustav. Closed-End Investment Companies:Issues and Answers. Vol. 7. Springer Science & BusinessMedia, 2012.
Bottazzi, Laura, Marco Da Rin, and Thomas Hellmann. "Theimportance of trust for investment: Evidence from venture capital."Review of Financial Studies (2016): HHW 023
Laopodis, Nikoforos. Understanding investments: theories andstrategies. New York: Routledge, 2012.
Steinberg, Jonathan L., and Luciano Siracusano III. "FinancialInstrument Selection and Weighting System and Method." U.S.Patent Application No. 13/412,434.