Unit Investment Trust - Why is it Attractive to Individual Investors?

A unit investment trust (UIT) is one of the three types of investment companies (the two others are mutual funds and close-ended funds) that exist in the financial market. Basically, an UIT buys different kinds of securities and puts them into one big unit. Afterwards, it divides it in smaller units that are sold to investors. For example, in the market you may find a municipal bond unit investment trust, which specializes in offering units, composed of securities issued by state and local organizations.

How Are They Created?

If an organization wants to create an UIT it needs to elaborate a document named Trust Indenture, which is a contract between the Sponsor and the Trustee of the fund. The Sponsor is the one who selects and gathers the securities that are going to be used, while the Trustee is the one who keeps the securities, maintains the records of the unit holders and is responsible for the accounting and tax reporting.

What Are The Different Sections Under UIT?

Currently there are three kinds of UIT's. The first one is known as taxable fixed income, and its portfolio is composed of US Treasury, US Agencies and corporations. The income may be monthly, quarterly or semi annual.

Then there is the tax free fixed income, which is composed of municipal bonds. The income is paid monthly or semi annually.

Finally, there are equities, in which the UIT can acquire securities issued by private entities as stock, participate in a real estate investment trusts (REIT) or a regulated investment company (RIC).

A REIT is a corporation that invests in real estate. Due to a special regime, it doesn't pay taxes, while a RIC can be a mutual fund or a real state trust. The risk is higher, but also the possible return over investment (ROI).

And what about the other two type of investment companies? How is an UIT different from them? In the case of a mutual fund, the main difference is that when bonds reach maturity, the returning money is reinvested in other security. That means that a mutual fund never ends while a UIT has a determined beginning and an end.

Regarding Collective Investment Schemes (CIS), their main difference is that they can be open ended like a mutual fund or close ended like an unit investment trust. Additionally, they have a fund manager, who is in charge of following the advances of the portfolio.

What Should You Consider Before Investing In UIT?

If you are thinking about investing in an UIT you should consider that this instrument was created for investors who have a determined goal. The investor knows each detail of the securities in the portfolio such as when the unit would reach its maturity and how much money he is going to receive for his investment.

Continue to: Benefits of Unit Investment Trusts