Unit investment trusts are investment products organized under the same laws as mutual funds and closed-end funds. Unit trusts are sold exclusively through brokers and cannot be purchased direct like no-load funds or on the stock exchanges like closed-end funds and exchange traded funds. Unit investment trusts have have historically held portfolios of bonds, but the number of equity UITs has been growing.
The stand-apart feature of unit investment trusts is a fixed termination date. On that date the securities in the trust are sold and the proceeds distributed to unit holders. A new unit trust can buy a diversified portfolio of bonds that mature in 20 years and the trust sponsor can give it a 20-year termination date. Investors in the units know what the value of their units will be at termination, protecting principal values.
A unit trust holds a portfolio of securities, either bonds or stocks. Investors can buy into the diversified portfolio with an investment as low as $1,000. An investor would need $50,000 to $100,000 to put together a diversified bond portfolio. Once a unit trust purchases the securities, the portfolio remains static. Securities are not bought or sold from the portfolio. A unit trust investor knows exactly which bonds or stocks are held in the portfolio.
Reinvestment of Dividends
Bond unit trusts pay the interest earned from the bond portfolio as monthly dividend distributions. An investor can elect to take the dividends in cash or have them reinvested into more units of the trust. An individual bond investor only receives interest payments twice a year. The bond investor must also decide where to invest the interest payments received from individual bonds. Unit trusts allow a compounding of interest earnings, while individual bond investments do not offer that option.
Repurchase of Units
The sponsor of a unit investment trust is required to buy back units of investors who want to sell their units. The units will be bought back at the current net asset value -- NAV -- of the units without any additional fees or commissions. This is in contrast to closed-end funds, which can trade at deep discounts to the NAV. UIT units are also more liquid than many individual bond issues. The NAV of a unit trust may be higher or lower than the initial price paid for the units.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.