When it comes to investing, two big-buzz concepts are diversification and professional management. Diversification just means don't put all your eggs in one basket. Professional management is a little more complex. It can include anything from seeking advice on what investments to buy, to having a professional manager actively buying and selling for your portfolio. You can get both diversification and professional management of your money by investing in unit investment trusts.
The U.S. Securities and Exchange Commission is the federal agency charged with regulating investment companies. There are three types of investment companies, the most well-known type being mutual funds. The other two types are closed-end funds and unit investment trusts, commonly referred to as UITs. Investment companies pool the money from a number of different investors and use those funds to buy a number of different securities, such as stocks and bonds. Each investor owns a pro rata share of each security in that pool of investments.
A unit investment trust in similar to a mutual fund in composition. Both types of investment companies use the pooled funds from their investors to buy a portfolio of securities. A major difference between the two is what happens after this portfolio is purchased. Mutual funds tend to manage their portfolios by buying and selling securities based on the fund's investment objective. A unit investment trust's portfolio typically remains stable. There is no real need for additional portfolio management, because the securities in the trust stay in the trust until the trust terminates.
Issue and Termination
Unit investment trusts usually issue a fixed number of units during their initial public offering. Most trusts provide a ready secondary market for units, which means the trust will buy back units at the current net asset value. The trust might choose to re-sell those shares to other investors. Unlike mutual funds, unit investment trusts have a finite life. UITs typically terminate in 13 months to five years. Once the UIT terminates, the securities in the portfolio are sold and the proceeds are distributed to the unit holders.
Unit investment trusts give you a what-you-see-is-what-you-get investment, because the portfolio you buy doesn't change for the life of the trust. Since you don't have anyone buying or selling securities in the trust, management costs and transaction fees are typically much lower than in comparable mutual funds. On the down side, if a security in the trust performs poorly, there's no one there to dump it, so the whole trust might take a big hit. Like all investments, there are risks involved. Even a UIT that performed exceptionally well last year could lose money next year.