What allows UITFs to invest in derivatives?

Unit Investment Trust Funds (UITFs) are allowed to invest in derivatives primarily because of the potential to increase Net Asset Value Per Unit (NAVPU). Derivatives can be used by UITFs to hedge against risks, enhance returns, or gain exposure to certain asset classes without needing to hold the underlying securities directly. The effective use of derivatives can amplify the returns on the fund’s investments, thereby potentially increasing the NAVPU. This potential for higher returns makes derivatives an attractive investment option within the context of UITFs, as long as they are managed within the fund’s risk tolerance and investment strategy.

Regulatory approval from the SEC is essential for fund operations but does not directly allow or prohibit the investment in derivatives; rather, it sets the framework within which UITFs must operate. Market demand for safe investments is a generalized observation and does not specifically relate to the ability to invest in derivatives. A mandate from the trust organization is important for guiding investment decisions but is not the sole factor enabling investment in derivatives, as the nature and function of derivatives themselves are what make them a tool for increasing NAVPU.