During mid-2000, many investors, for the sake of persistent financial growth, got fascinated with the oil & gas industry. This was all due to a great increase in the prices. Although many investors stuck to conventional means for money-making, there were other options that could provide them with express exposure to the energy market. The purpose of this article is to discuss the purpose & types of the unit investment trusts & their advantages & disadvantages & to help the investors decide whether they are required to enhance their portfolio or not.

Type And Constitution:

Based on the definition, there is not any difference between the oil & gas UITs and others. All the units are the basic divisions of a trust that are charged and traded to investors. In this way, the investors become shareholders of the trust and get a benefit upon maturity of the trust where all the profits and losses are equally divided among the investors. Oil & gas UITs are different in one sense that they are directly involved in the production & drilling of oil & gas and after that go by through the profits & operating expense.

Potential Investors in Oil & Gas UITs:

Investors wanting more direct & clear-cut revenue and profit should consider the oil & gas UITs. These UITs also offer economic bonuses that function as an incentive for investors to invest in them. The collective investments mainly focused on energy do not always provide a direct exposure and contribution of the investors; rather equity interests are bought in any of the oil, gas or other industry. Energy mutual funds do not help in the pass-through taxation treatment. In the case of UITs, taxable capital profits are not dealt with until the trust reaches its maturity. This is one difference between the oil & gas UITs and energy mutual funds. Thus, since, the investors get immunity towards paying taxes on the regular basis; they could get aggressive benefits & gains from the investments.

Advantages And Disadvantages:

• Investors can take pleasure in pass-through tax status, as is observed in direct dealings and partnerships.
• Since oil & gas UITs can get their depletion deducted, a huge amount of deducted operating costs can be gained as benefits too.
• The disadvantages include that the oil & gas UITs are comparatively perilous in a sense that they cannot be replaced until the trust reaches its maturity. And even the properties that become useless during the tenure cannot be reinstated.
• The value of oil & gas units gradually moves towards a downfall as the resources of production in a trust start to diminish with the passage of time.
• Issues such as electric fees, pumping fees, parts replacements, etc. are the factors that gradually eat up the investor’s profits & income.
• Income generated from oil & gas UITs does not remain constant and tends to ebb and flow with the fluctuation of energy prices globally. However, this problem can be avoided by investing in both oil & gas fields in the same trust, so one could get the benefit from either while the other declines and vice versa since their values do not necessarily move to and fro together.
• The unpredictable nature of drilled well to produce fuel or not always remains a problem and the costs upon drilling could get wasted very easily. This situation could lead to the decrease in the trust’s credibility among investors and may result in the shareholders’ expected income.

Points To Ponder:

The question faced by many investors is, how to find the appropriate UIT of their liking. Following is some tools to guide you in choosing the correct UIT for your investment:

• The most important factor to be considered is the level of potential risk that could be related to the trust & could affect the investment.
• Trust mainly dealing with drilling projects are ore contemplative about the pros & cons than the UITs specifically dealing with production phases.
• A successful drilling expedition means that you have a greater chance of getting enormous revenue and also a significant reduction in taxes.
• Investors wanting a steady and plain source of income should not go into the aggressive and virulent trusts; instead they should try choosing mature trusts with known outputs.

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