Features of Unit Investment Trusts
A unit investment trust (UIT) may be described as a SEC-registered investment company that deals with a fixed stock portfolios and / or bonds. UITs have a pre-determined life-span. Although a UIT portfolio may constitute of different types of securities - the two principal types are equity trusts and bond trusts, also called fixed income trusts.
For a bond UIT, the termination date of the trust and maturity dates of the bonds will be at the same time. When the bonds mature the proceeds with be distributed to the unit holders. Bond trusts are ideal investment for investors looking for current income and a guaranteed return of principal value.
The UIT holdings, mentioned in the prospectus, are meticulously selected by professionals to achieve the declared investment goals like income flow, growth investing and capital appreciation. Further, an UIT, like any mutual fund (closed-end or open), is subject to federal laws and regulations, and its operation is overseen by the U.S. Securities and Exchange Commission (SEC).
The investment philosophy of UIT is to buy and hold and once the trust's portfolio is selected, the securities are not traded except in extreme cases. A UIT holds a diversified portfolio of securities in a planned way to minimize investor's risk.
An UIT also provides the investor with a mixed portfolio of securities compared to attempting to buy stocks or bonds on a pick-and-choose basis which can be tedious but also prone to greater risks. The difference between UITs and mutual funds is securities in UIT may not be actively traded. An UIT selects and buys a fixed portfolio of securities and prefers to hold them throughout the life of the UIT.
It is absolutely essential that prospective investors should carefully study the prospectus to know the investment objectives, associated risks as well as the charges involved before investing in UIT. Unit investment trust units are purchased through investment advisors and the initial unit price includes a sales charge to compensate the selling broker.