Should I Invest in Unit Investment Trusts?

How to Decide if UITs Are Right for You

A Unit Investment Trust isn't a mutual fund. But UITs are so similar in so many ways that it helps to think of them as mutual funds ... but with a few twists.

First, just like a mutual fund, a unit investment trust is a collection of other investments. In the bond world, a UIT is a collection of bonds, bond funds or bond derivatives. But unlike a mutual fund, the investments in a UIT aren't traded by the fund manager.

Rather, the manager buys the investments and holds them until maturity.

Second, buying a UIT is slightly different from buying a mutual fund. The management fees of a UIT are much lower than those of mutual funds -- presumably because there's not much "management" required in a buy-and-hold portfolio like a UIT. There are, however, sales fees associated with UIT. Just like the fees associated with mutual fund loads. However, with a UIT you'll pay a sales commission to buy, but never to sell.

Third, because a UIT consists of investments that will be held until maturity, a UIT -- unlike a mutual fund -- also has a maturity date. Some UITs are designed to mature in five years or so. Others are long-term investments that mature 30 years after creation.

Should I Buy a UIT?

There are three main factors worth noting when considering a UIT for your portfolio. Two are pros. The other is a con.

On the positive side -- the biggest advantage of a UIT is also the biggest selling point for a bond mutual fund: diversification.

A UIT holds a number of varied bonds and related investments. And buying a collection of investments is generally safer than buying a single investment.

Another positive is that the diversified holdings of a UIT don't change. If you own a UIT you know what bonds are in it. You don't have to wait until your quarterly statement to see what the fund manager has bought and what he's sold.

So a UIT offers a consistency that can be beneficial to many investors -- particularly retired people.

The third factor, although closely related to the two positive factors, must be considered a negative. Because a UIT holds a number of bonds within it, a potential investor should research all the holdings to ensure they meet your individual tolerance for risk, etc. That can be a time-consuming process. And for many investors it may be a wiser move to buy less complex investments such as U.S. Treasuries.

Or to put it another way -- I'd give the same advice to someone considering a UIT or a mutual fund: Do your homework.