A pooled investment product, a unit investment trust, holds a fixed set of securities. The portfolio is fixed and will not be affected once created. Investors buy units and are entitled to returns according to the performance of the trust. Due to this, most people consider these products as long-term investments. However, it may not suit every investor. Understanding potential drawbacks will give clarity on cost, flexibility, and market condition issues. This guide lists five reasons how a unit investment trust might not work for everyone and gives an explanation of how basic tools such as knowing OTM full form or understanding financial terms can help in improving decision-making.
Limited Flexibility
A unit investment trust is a fixed portfolio. Once created, the trust can never buy or sell securities. That is why it is inflexible. Market conditions change. Prices rise and fall. Poor performers remain in the portfolio. The trust does not adjust to these changes.
If someone has a desire for active management of his investments then that investor will find it limiting. On the other hand, no new information can be acted upon. Dissolution or maturity, and waiting until that happens to get any response can lead to frustration during such volatile stages of the market.
Costlier for Some Investors
For unit trusts, there is a massive number of fees involved, which could also include creation charges, management-related costs, and distribution expenses. These fees, in turn, reduce returns. A lot of investors generally do not notice the effect in the beginning; later on, the cost impact becomes quite clear.
Some prefer investments in which they first study all the fees before investing. In tracking payments in systematic plans, understanding OTM full form helps investors. Similarly, it will help if investors also understand all the fees included in a unit investment trust before deciding.
No Active Management While Market Changes
Once launched, a unit investment trust does not change its holding. So, the portfolio remains static in all economic changes. It does not respond if a shift in interest rates happens, if a sector is under pressure, or if regulations change.
No active management would be there. The investor must undergo the performance of the defined portfolio over time. It may suffice for returns, mainly in case of uncertain markets. But the typical investor would love to go for the dynamic approach and this structure might not fit such an investor.
Limited Control to Investor
Investors do not have any choice regarding which securities form a part of the trust or not. They can never add securities or holdings to the trust or remove holdings from the investment mix. They buy units of a pre-set structure. Such a norm reduces investor control.
Some investors desire hands-on involvement in the issue; they may want to bring their risk down or increase the diversification further. A unit investment trust does not provide this. Lack of control might deter those who like their plans customized.
Restrictions Imposed by Maturity Date
Every unit investment trust has a predetermined maturity date. For these investors, the future is something they must wait for until this date arrives. Of course, the units could be sold before the end date but, depending on market conditions, prices may be lower than targeted. Hence, losses could occur if the value of units traded is low.
A general maturity structure creates inflexibility because the investor cannot extend the life of the trust. He will not be able to hold it longer to recover returns. Long-term goal investors might find this unpleasant.
When Unit Trusts Might Still Be Applicable to Very Few
A unit investment trust still works for those investors wanting simplicity because, with it, investment decisions are often quite limited and fixed portfolios tend to be more favored by investors who don’t want to make active decisions. However, every investor will need to check out certain aspects prior to making a commitment.
Learning important financial terms would also further an investor’s cause in making informed choices. For example, learning OTM full form would help investors to automate payments in other financial plans. Knowing such terms sets up one for a revelation on how much financial planning depends on clarity of information.
What Should Be Considered by Investors Before Investment
Investors should consider the following:
- Fee structure
- Maturity date
- Portfolio content
- Risk level
- Liquidity needs
These points help guide the investor to know whether a unit investment trust suits his needs.
Conclusion
Unit investment trusts offer a fixed and structured approach. It brings up several drawbacks, such as a lack of flexibility, control, and fixed maturity dates, upon which investors should study before making decisions. Understanding terms such as OTM’s full form and going through the features carefully will help the investors to become clearer and more confident in their decisions.
