What is the principal risk faced by assets in a UITF during inflation?

In the context of Unit Investment Trust Funds (UITF), inflation primarily impacts the purchasing power of money and the real return on investments. When inflation rises, the value of cash flows generated by investments can diminish in real terms, thereby affecting their overall appreciation.

The correct answer highlights that deposit risk is a significant concern during inflationary periods. This risk pertains to the potential loss of value of the underlying assets as the interest rates on deposits may not keep up with the increasing rates of inflation. As inflation rises, investors may find that the returns on their deposits do not provide adequate compensation for the loss of purchasing power, effectively making the cash holdings in a UITF less valuable over time.

While market risk involves fluctuations in investment values due to market dynamics, the focus here is particularly on the context of inflation's direct impact on deposit values within the UITF framework. Other risks, such as credit risk and operational risk, are relevant in their own contexts but do not address the specific concern of inflation diminishing the value of investments in a UITF as effectively as deposit risk does.