What is liquidity risk in the context of UITFs?

Liquidity risk in the context of Unit Investment Trust Funds (UITFs) refers to the risk associated with the inability to quickly sell or liquidate the underlying assets or units without significantly impacting their price. This risk becomes particularly important in situations where an investor needs to access their funds quickly, but the market conditions do not allow for a fast or favorable sale of the units.

In UITFs, the liquidity risk could arise from various factors, such as a lack of buyers in the market or the nature of the underlying assets, which may not be easily tradable. If the assets in the fund are not readily marketable or are thinly traded, an investor might find it challenging to exit their investment promptly, or they might have to accept a lower price than expected.

Understanding liquidity risk is crucial for investors in UITFs, as it influences their ability to manage cash flow and respond to unforeseen financial needs without incurring significant losses.