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|What is a municipal unit investment trust?
By The-Adviser.com -
|New York - A
municipal unit investment trust is similar to a mutual fund for municipal bonds. A
brokerage firm buys large blocks of several municipal bonds, generally with the same
maturity date and then then puts the shares into a trust and sells units in the trust to
individuals. The portfolio generally remains untouched although dividends may be paid out
periodically. Although units trusts are generally not publicly traded, individuals
normally can ask the brokerage firm to buy back the holdings at a price close to their net
Advantages of buying a trust is that it provides built-in diversification from owning one security and they help protect against losses from the default of a single bond.
There are some disadvantages of buying a municipal unit investment trust. Unlike a bond, they are not deposits or obligations from any governmental agency to you. They are also subject to interest rate risk, credit risk, prepayment or call risks, especially if the Trust is not held to maturity.
Before buying a municipal unit investment trust, be sure that you understand the fees. Most brokerage firms charge 1% for a load fee and then deduct another 1.5% to 2% annually for management fees. These fees are generally higher than an index mutual bond fund.
An independent Fee-Only Financial Adviser can help you determine if a unit trust investment is appropriate for you.
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