Bond Unit Investment Trusts (UIT)

Unit investment trusts are groups of pulled investors who select specific securities to hold for the lifetime of the trust. A bond unit investment trust (UIT) purchases only bonds including municipal bonds, state bonds and Federal bonds. The investors agree to the purchases when they purchase placement in the trust, and those securities are locked in from day one. UITs are similar to mutual funds, but the fact they are never altered presents unique benefits and challenges.

Benefits of Bond UITs

The key benefits of a bond UIT relate to its predictability. From the day you invest in this product, you know exactly what you are purchasing, and you know those purchases will never change. This gives you great income stability over time. With a bond UIT, you are investing in highly stable securities that provide predictable, consistent returns. Further, since no manager is involved in making changes or trades within the trust, there is a very low management fee and no transaction fees in the future. Ultimately, bond UITs are some of the most cost-efficient, low risk options on the market today.

Drawbacks of Bond UITs

The drawbacks of bond UITs also relate to their predictability. With consistent interest rates set on bonds, there is always a risk the bonds will be outpaced by inflation. When this occurs, the profits on the bond will be dramatically reduced. No manager will be prepped to step in and resolve this problem. The investors do not have the option of selling off bonds they no longer find profitable. As a result, an investor is completely locked into the UIT for its entire lifetime. When the market is good, this is an advantage. When the market turns, this can be a nightmare for an investor.

Uses for Bond UITs

Highly predictable structures like Bond UITs rarely present large chances of profit or appreciation over time. Instead, they are mostly used as a means to supplement income with small payouts over the life of the trust. These options, then, are great for investors who would like to protect their initial investment and receive small returns. Retirees are common investors in all UITs, and bond UITS are particularly appealing to retirees. They may also be a good financial instrument to purchase for a young family who would like additional income over time without the risk of losing investment capital. 

Purchasing Bond UITs

Bond UITS are not generally available through a broker. These instruments are typically arranged and sold through insurance companies or financial management firms. If you would like to purchase a bond UIT, you will have to locate an entity that is currently offering this product for sale. Then, you will have to find a specific bond UIT with an investment capital requirement in line with your goals. For example, some have a minimum investment amount of $1,000 to $5,000. Once you have located an attractive option, go straight to the source to attempt to purchase the shares you would like to own. If the UIT is still open, you will be able to do so directly. 

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