A Unit Investment Trust (UIT) is a US investment company offering an unmanaged (fixed) portfolio of securities (usually bonds but occasionally stocks) having a definite life. UITs are assembled by a sponsor and sold through brokers to investors.

Although UITs are not technically a type of mutual fund, they behave somewhat similarly to them. Money is pooled together from a group of investors, which is then used to buy a range of securities. However, unlike a mutual fund, the UIT's portfolio is frozen after the initial securities are bought, which means that the Trust's securities will not be sold or new ones bought, except in certain situations (for example, when the sale is required due to a merger or a company is filing for bankruptcy). In addition, a UIT is created for a specific length of time (anywhere from one to five years), and after the Trust expires, investors may choose to roll over their investment into a new UIT or receive their investment in cash (minus operating costs and sales charges).

In general, UITs have lower operating costs than mutual funds, as after the initial set-up, they do not buy or sell any of the securities. However, they may have high entrance/exit fees and sales charges that could result in higher costs than the fees paid to a mutual fund. In addition, Trusts can only be bought through the investment houses that created the trust, rather than on the open market, and so it can be difficult for investors to compare prices across UITs before deciding which one to purchase.

You need be aware of all the charges that apply to a unit trust before you decide which trust to invest in, as charges can have a major impact on the performance of the investment.

Types of UIT

A UIT portfolio may contain one of several different types of securities. The two major types are bond (fixed income) trusts and stock (equity) trusts.

Bond Trusts

Bond trusts issue a fixed number of units, and when they are all sold to investors, the trust's primary offering period is closed. This type of trust pays a monthly income, until the first bond in the trust matures or is called. At this point, the funds from the redemption are distributed to the clients via a pro rata return of principal. The trust then continues paying the new monthly income amount until the next bond is redeemed, and so on until all the bonds have been liquidated out of the trust. Bond trusts are generally appropriate for clients seeking stability of principal and current income.

Stock Trusts

Stock trusts are generally designed to provide capital appreciation and/or dividend income. They have a set termination date, on which the trust liquidates and distributes its net asset value as proceeds to the shareholders.

You need be aware of all the charges that apply to a unit trust before you decide which trust to invest in, as charges can have a major impact on the performance of the investment. To invest you can buy unit trusts direct from the unit trust management company or you can choose to go through an independent financial advisor, stockbroker or an investment manager.