Mutual Funds Versus UITs

Q How do unit investment trusts differ from mutual funds?

— K.A., Augusta, Ga.

A Mutual fund managers invest in assets (such as stocks or bonds) according to stated sets of objectives. Shares are issued and redeemed on demand at a specific net asset value that is determined at the end of each trading day (based on the total market value of the fund's holdings). The number of shares is not fixed. If many people want to buy in, the fund company will issue more shares.

Meanwhile, a unit investment trust (UIT) invests in a relatively fixed portfolio of investments. These are held until the trust is liquidated at a predetermined date in the future. Investors who want to trade shares of a UIT before it matures can often do so in the secondary market. Unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust's actual holdings. When you buy shares of UITs, you typically pay a sales fee, or load, of around 4 or 5 percent. Many mutual funds carry no sales load at all.

Learn more about mutual funds at www.fool.com/mutualfunds/mutualfunds. htm and www.ici.org.

Q What does it mean if a company's projected price-toearnings (P/E) ratio is much lower than its current P/E?

— L.W., Nevada, Mo.

A It suggests that rapid earnings growth is expected. Imagine that Holy Karaoke Inc. (ticker: HYMNS) trades for $24 per share and has $1 per share in annual earnings. Its P/E is 24 (24 divided by 1 is 24). If it's expected to earn $3 per share next year, its projected P/E for that year is 8 (24 divided by 3 is 8).

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