Jim'sMoneyBlog

Financial Opinion and Insights

Mutual Fund or Unit Investment Trust (UIT)

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Do you know the difference?   I was talking to someone the other day and she told me she purchased over $350,000 worth of municipal bonds a few years ago but they’ve all been ‘frozen’ since the credit meltdown.  She’s still receiving the interest, but can’t get her money back!

After a little more questioning it became apparent she really didn’t own any individual bonds.  What she appeared to have was a UIT, purchased because the company creating the portfolio was a well-known name.  Familiar story?

Do you know what a UIT is?   Let’s start by saying there’s nothing wrong with UITs, per se.  Virtually all investment vehicles have their uses; the question is which is appropriate for who?    Individual securities, mutual funds, and UITs all have their own characteristics.

  • A mutual fund is a managed portfolio of securities, which means there is a manager who is buying and selling securities for the portfolio.
  • A UIT is a packaged as a ‘fixed’ portfolio of securities with no manager, which means there is no buying and selling and there is no manager.  The fixed portfolio is generally packaged to be held for a fixed period of time.  Often, where bonds are the securities, money is returned as bonds mature or they can be invested in other UITs.

While both mutual funds and UITs are considered `pooled’ portfolios – your money is pooled with money from other investors – each has it’s advantages.  Mutual funds to offer active management and greater liquidity in that UITs can be more costly to trade.  UITs, because there is no active management, generally have lower expenses, which could possibly enhance return.

Should anyone put $350,000 in a UIT or even a mutual fund?   Not in my opinion.  First of all, the first reason anyone would want a pooled investment (mutual fund or UIT) would be to purchase diversification.  She bought a UIT to achieve diversification – otherwise she would have purchased a single bond.  Unfortunately, now that she can’t access her money, she doesn’t like diversification – something she equates with her investments being illiquid.  Can you smell the next mistake coming?

You see, an investor with $350,000 can create needed diversification without having their money pooled with others as in either a UIT or mutual fund.   I’ve discussed mutual fund characteristics in other postings; but in this person’s case – wanting to buy and hold – why subject the entire portfolio to either cost or trading impediments characteristic of a UIT?  If she wanted professional selection, private institutional managers could perform the same function and she would have owned the bonds individually without having her money pooled with others or being subject to an all-or-none trading impediment applied to the entire portfolio.

Financial planners and advisors see these kinds of missteps quite often.  Sometimes it’s because there was a product-seller involved trying to make a commission; but, usually it’s because the investor didn’t seek out professional guidance from an objective and qualified advisor.

Moral:  Get help.  And, don’t confuse the comfort of a ‘household name’ with sound advice from a qualified source.    The right advisor should become a life-long relationship.

Jim

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The Independent Financial Group is a fee-only registered investment advisor and does not sell products earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  This post represents the author’s opinion and should not be regarde as investment advice which is provided only to IFG clients.  You can reach Jim at 805.265.5416 or through his website, http://www.indfin.com.