Unit investment trusts (UIT) and mutual funds look like twin investments, but like twins they are very different, despite their surface similarities. UITs reflect a specific investment philosophy and a stated purpose such as tax-exempt income or price appreciation through a particular stock picking strategy. A mutual fund is most often less niche-oriented, though it may also represent specific market sector investing.
Both UITs and mutual funds are portfolios of securities. They may contain bonds or stock or a combination of both. Where they differ is in active management of the portfolio. The portfolio in a UIT remains the same over time unless there is a merger or chance of default in one of the securities. If you purchase a UIT, you will always know what you own.
A mutual fund is an actively traded portfolio that may change completely during the time you own it. It is similar to having a professional portfolio manager actively trading your investment portfolio. Active management is not necessarily better.
UITs generally contain relatively safe investments such as bonds, preferred stock or blue chip stock and do not need much active management. Mutual funds may contain a mix of investment risks that require constant monitoring.
A mutual fund is an ongoing investment, while a UIT has a specified maturity at which you will receive the liquidation value in the case of stocks, or the return of principal if the UIT is invested in bonds. The time until maturity can range from one year to 20 years or more and there is an inception date, which marks the date when the securities in the portfolio are purchased. This makes figuring out whether there are profits or losses much easier with a UIT than with a mutual fund, because mutual fund managers are constantly buying and selling the securities in the portfolio.
You can sell a UIT just as easily as you can sell a mutual fund. You may even find that there are fewer or smaller management and transaction fees and less delay in settling your sales involved with UITs than some mutual funds, though you should always check into the terms of each particular investment you are considering. Both UITs and mutual funds are rated as to credit quality, and the higher the rating, the better the instrument will fare in the securities marketplace, which adds to your ease of selling your investment at a market rate price.
Research the quality, fees and performance of any packaged investment you are considering. It is easier to know what you are buying with a UIT, because the portfolio rarely changes. Management and transaction fees can cut into your income and profits from your investment in a packaged fund, so it is important to ask questions about fees before you invest. Finally, never ignore your investments. Even though they are professionally created and managed, UITs and mutual funds are subject to economic and market forces and can fare well or poorly.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.