NEED steady income? Are you a couch potato at heart? Want to buy an investment and then just throw it in the desk drawer until it matures? Then maybe you should consider a financial product called a unit investment trust (UIT).
UITs are professionally selected portfolios of securities - typically municipal bonds, but sometimes corporate bonds and Ginnie Maes (government backed mortgage securities), and sometimes equities. The trust is held for a set period of time, usually between one and 30 years.
John Nuveen & Co., a Chicago financial-services firm, is one of a dozen or so major investment houses in the United States offering UITs. Nuveen has just issued a new UIT called the Insured National Trust 308 Series. This is a portfolio of about 15 municipal bonds.
''The average life of the trust,'' says Rick Vaughan, a broker with Nuveen, ''is 27-1/2 years.'' Minimum investment: $5,000. The current effective yield, he says, is 5.13 to 5.18 percent. Payments of earned interest can be made monthly, quarterly, or semiannually.
UITs are unmanaged. That is, the securities in the trust are not bought or sold during the lifetime of the trust, although some instruments, such as a bond, may mature, and thus, be removed from the portfolio. But if that happens, principal is also returned to the investor, which means that the overall value of the trust package drops, resulting in a corresponding drop in interest income.
Units (or trust ''positions'') often cost as little as $1,000.
UITs are probably unknown to many investors. Yet there were some 13,310 UITs outstanding as of Dec. 31, 1994, the latest period for which full statistics are available, according to the Investment Company Institute, a Washington-based trade group. The trusts had a cumulative value of $74 billion at the end of 1994. Some $57 billion of these assets were in 12,436 tax-free bond trusts. There were 568 taxable bonds trusts, with a value of $7.25 billion. And there were 306 equity trusts, with a value of slightly more than $9 billion.
Many buyers are retired
Most investors in UITs are probably ''older retired people seeking a steady stream of income,'' says Albert Fredman, a professor of finance at California State University, Fullerton. In addition to providing regular interest payments, UITs are advantageous to especially wealthy investors, since discounts on commission charges are usually offered at certain ''breakpoint'' thresholds, such as $50,000 and $100,000, Mr. Fredman says.
Among main characteristics of UITs:
Maturity. The bonds, in the more typical fixed-income trust, are held to maturity, or until the bond is called (redeemed by the issuer), or until sold by the trust sponsor if the bond looks as if it might default.
Broker products. While trusts are assembled by a sponsor, usually a major financial house, the trusts are sold by broker-dealers. The commission charge, which can range up to 5.5 percent, is a front-end charge, paid when the product is bought.
Expenses. These tend to be low, because there is little or no actual management of the trust.
Unit trusts are also bought and sold on the secondary market, after the original issuance. A UIT need not be held until maturity. A trust position can be redeemed on any day. The selling price will be based on the bid prices of the remaining securities in the portfolio.
However, one woman who inherited a few small trusts found it time-consuming and complex to change the name to her own. And she could not close them out or sell them. Nor could she get the sponsor of the UITs to change the tiny monthly payments to annual payments, though at least one was persuaded to pay on a semiannual basis.
Precisely because the term ''unit investment trust'' sounds so bland, many UIT products are marketed as ''defined asset funds.'' A number of the equity trusts are specialized packages called - believe it or not - ''dogs of the Dow.'' They are issued by such firms as Dean Witter, Paine Webber, and Prudential Securities. These ''dogs'' generally consist of the 10 highest-yielding stocks in the Dow Jones industrial average. The portfolio is turned over at the end of each calender year, then renewed with the latest ''top 10.'' But because the 10 stocks are closed-out yearly, there could be expensive tax consequences for some investors. Thus, investors typically roll over their assets into a new portfolio.
In the mutual-fund family
If unit trusts sound like a mutual fund, it is because they are part of the same family tree. UITs are regulated under terms of the Investment Company Act of 1940, which also covers open-end and closed-end mutual funds.
Some experts, such as Fredman, wonder why average investors would want to put their money in a unit trust when they can instead invest in a no-load mutual fund, which has no sales charge. That compares with the 3- to 5-percent charge for UITs. Many no-load funds, which include bond funds, also have very low management expenses.
Estimated long-term returns on UITs can be questionable, Fredman says. What if key bonds are called? he asks. Does the package include lower-grade bonds or even riskier junk bonds?
Although they may not be as good an investment as a no-load fund, Fredman holds that for most individuals unit trusts can be better than buying individual bonds. The unit trust package inherently provides for diversification. And the bonds or other securities have been chosen by a financial professional.