Municipal Investment Trust
What Is a Municipal Investment Trust?
Municipal investment trusts are a type of unit investment trust (UIT) that invests exclusively in municipal securities. Municipal investment trusts are intended for higher-income investors seeking tax-free income.
How a Municipal Investment Trust Works
A UIT is a investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. Specifically, municipal investment trusts allow individuals to invest in a diversified pool of municipal bonds — likewise called munis — which goes through tax-free income. UITs, just like mutual funds and closed-end funds, are defined as investment companies.
Municipal investment trusts allow individuals to invest in a diversified portfolio of muni bonds with a low initial investment requirement. Similarly as with all UITs, municipal investment trusts are sold by investment advisors and an owner can reclaim the units to the fund or trust, as opposed to putting a trade in the secondary market. Investors can recover municipal investment trust shares, or units, at net asset value (NAV) to the trust either straightforwardly or with the assistance of an investment advisor.
Mutual Funds versus Unit Investment Trusts
UITS are like mutual funds in that the two of them comprise of collective investments in which numerous investors join their funds to be managed by a portfolio manager.
UITs are bought and sold straightforwardly from the company that issues them, albeit in some cases they can be bought on the secondary market. This makes them like unconditional mutual funds. UITs are additionally issued through a initial public offering (IPO), which makes them like closed-end mutual funds.
An important difference among UITs and mutual funds is that UITs aren't actively-traded. Securities in a UIT aren't bought or sold except if there's a change in the underlying investment, for example, a corporate merger or bankruptcy. Investments in a mutual investment trust are held until maturity, and some even have a maturity date.
Normally, the management fees of a municipal investment trust are lower than the management fees of a mutual fund, somewhat in light of the fact that there isn't as much active management included.
Mutual investment trusts are available through brokers and normally have a sales charge and a base investment requirement. Be that as it may, municipal investment trusts don't charge a commission to execute a sell order.
Advantages and Disadvantages of a Municipal Investment Trust
There's a ton to like about municipal investment trusts, in that they can offer muni-bond diversification at a genuinely low price. One of the primary advantages that this type of trust offers is a regularly scheduled payout of income, rather than the quarterly or semiannual payment of interest common with most individual municipal issues. Additionally, a few investors like to get their work done about individual bond holdings ahead of time, and appreciate that the holdings in a municipal investment trust won't change.
In comparison, the powerlessness to buy or sell prior to maturity limits some investment strategies that municipal investment trusts utilize. A mutual bond fund probably costs more. Yet numerous muni bond funds utilize tactical methods to exploit more limited term market conditions. For instance, some municipal bond funds will sell bonds just prior to maturity on the off chance that there is a profit incentive to do as such.
They likewise can rapidly move to new opportunities. Express bonds of municipal medical clinics as of late endured a shot in light of proposed legislation, however the manager thinks the market has essentially gone overboard. A mutual fund bond manager can exploit that situation, where managers of a municipal investment trust will most likely be unable to do likewise.
Features
- A unit investment trust (UIT) is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time.
- Municipal investment trusts offer a regularly scheduled payout of income, instead of the quarterly or semiannual payment of interest common with most individual municipal issues.
- Municipal investment trusts allow individuals to invest in a diversified pool of municipal bonds — likewise called munis — which goes through tax-free income.
- Municipal investment trusts are intended for higher-income investors seeking tax-free income.
- Municipal investment trusts are a type of unit investment trust (UIT) that invests exclusively in municipal securities.
