Mutual funds and unit investment trusts are types of investment companies that pool investor money and the investor's own shares in the pool. Unit trusts are primarily focused in the bond market while the majority of mutual funds are stock funds. The more focused aspect of unit investment trusts may help an investor meet a specific investment goal.
Mutual funds are also known as open end funds because a fund will constantly sell and redeem shares. Mutual fund investors can elect to buy more shares at any time and the fund will buy back shares whenever an investor wants to sell. Individual unit investment trusts (UITs) are usually sold out at a single public offering and each trust has a fixed termination date. On the termination date, the securities in the fund will be sold and the proceeds distributed to the shareholders. To buy additional UIT shares, an investor must purchase the share in a new trust offered by the issuer.
A UIT buys a fixed portfolio of securities and holds those securities until the termination date. The trusts do not actively manage the portfolio. Management decisions are made when the securities for a UIT are selected. Mutual funds, however, have the ability to buy and sell securities in the portfolio to meet the fund's objectives. Actively managed mutual funds have a manager or managers that research and select investments to meet the fund's goals. Index mutual funds will buy and sell the securities to match the selected index. Mutual funds also have to buy and sell securities to meet the needs of shares sold and redeemed.
Mutual fund shares can be purchased through an investment broker or directly from a mutual fund company. Broker sold funds are usually load funds with a sales charge included in the share price to compensate the broker. Investors purchase no-load funds directly from the mutual fund companies and do not pay a sales charge. All UIT units are sold through brokers and a sales charge will be included in the unit sales price. There is not a secondary market for the purchase if UIT shares.
Mutual funds can be invested in stock, bonds and a combination of stocks and bonds. The majority of mutual funds are stock funds. According to the Investment Company Institute, there are approximately 8,000 stock and/or bond mutual funds. Approximately 60 percent of the funds are stock funds, 25 percent are taxable bond funds and 6 percent are tax-free municipal bond funds. The balance of mutual funds hold both stocks and bonds. Of the 6,000 UITs in existence at the end of 2009, the majority were municipal bond trusts with 57 percent of the trusts. Stock trusts were 35 percent of the total and taxable bond trusts were just 7 percent.
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- SEC: Unit Investment Trusts
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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.