WHAT IS a 'Municipal Investment Trust'

Municipal investment trusts are a type of unit investment trust (UIT) that invests solely in municipal securities. They allow individuals to invest in a diversified pool of municipal bonds, which passes through tax-free income. Municipal investment trusts are designed for higher-income investors seeking tax-free income.

BREAKING DOWN 'Municipal Investment Trust'

Municipal investment trusts allow individuals to invest in a diversified portfolio of muni bonds with a low initial investment requirement. As with all UITs, municipal investment trusts are sold by investment advisors and an owner can redeem the units to the fund or trust, rather than placing a trade in the secondary market. Investors can redeem municipal investment trust shares, or units, at  net asset value (NAV) to the trust either directly or with the help of an investment advisor.

There are both similarities and differences between mutual investment trusts and municipal bond mutual funds. One difference is that investments in a mutual investment trust typically are not traded. Rather, they are held until maturity, and some even have a maturity date.

Typically, the management fees of a municipal investment trusts are lower in comparison, partly because there is not as much active management involved, relative to a muni mutual fund.

Mutual investment trusts are available through brokers and usually have a sales charge and a minimum investment requirement. However, municipal investment trust do not charge a commission to execute a sell order.

Pros and Cons of a Municipal Investment Trust

There’s a lot to like about municipal investment trusts, in that they can offer muni-bond diversification at a fairly low price. One of the primary advantages that this type of trust offers is a monthly payout of income, as opposed to the quarterly or semiannual payment of interest common with most individual municipal issues. Also, some investors prefer to do their homework about individual bond holdings ahead of time, and like that the holdings in a municipal investment trust will not change.

In comparison, the inability to buy or sell prior to maturity limits some investment strategies that municipal investment trusts employ. A mutual bond fund likely costs more. Yet many muni bond funds employ tactical techniques to take advantage of shorter-term market conditions. For example, some municipal bond funds will sell bonds just prior to maturity if there is a profit incentive to do so. They also can quickly move to new opportunities. Say bonds of municipal hospitals recently took a hit because of proposed legislation, but the manager thinks the market has significantly overreacted. A mutual fund bond manager can take advantage of that situation, where managers of a municipal investment trust may not be able to do the same. 

RELATED TERMS
  1. Municipal Bond Fund

    A municipal bond fund is a fund that invests in municipal bonds.
  2. Municipal Note

    A municipal note is debt issued by state and local governments ...
  3. Obligation Bond

    A municipal bond whose face value of the bond is greater than ...
  4. Nontaxable Dividends

    Nontaxable dividends are dividends from a mutual fund or some ...
  5. Chapter 9

    Chapter 9 is a bankruptcy proceeding that provides financially ...
  6. Private Purpose Bond

    A type of municipal bond that is issued to finance a project ...
Related Articles
  1. Financial Advisor

    Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.
  2. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  3. Investing

    Do Municipal Bond Mutual Funds Offer a Tax Incentive?

    Learn about individual municipal securities and municipal bond funds, whose principal stability and tax-free yield appeal to high-income investors.
  4. Financial Advisor

    How to Find the Best Bets in Muni Bonds

    Approach investing in municipal bonds the same as you would investing in stocks.
  5. Investing

    The Top 5 Municipal Bond ETFs for 2016

    Learn about exchange-traded funds that invest in municipal bonds issued by local U.S. municipalities with returns on bonds exempted from federal tax.
  6. Investing

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  7. Investing

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  8. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  9. Investing

    5 Popular Municipal Bond ETFs in 2016 (MUB, SHM)

    Learn how the five most popular national municipal bond ETFs can generate income that is exempt from state taxes, as well as AMT in certain circumstances.
  10. Investing

    3 Best High-Yielding Municipal Bond Mutual Funds

    Discover the benefits of including municipal bond funds in your investment portfolio and learn about three high-yielding municipal bond mutual funds.
RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about the various tax implications for municipal bonds and zero-coupon municipal bonds at the state ... Read Answer >>
  2. Where can I buy government bonds?

    The type of bond dictates its purchase. Federal bonds are issued by the federal government, while municipal bonds are issued ... Read Answer >>
Trading Center