3 Reasons to Invest in a Municipal Investment Trust

A municipal investment trust is a type of investment vehicle that invests in municipal bonds. The investment trust purchases the bonds at the creation of the vehicle and then does not change the makeup of the trust at any point. Investing in this type of unit investment trust can provide you with several advantages.

1. Tax Free Returns

When you invest in a municipal investment trust, you will be able to realize tax-free income. Municipal bonds are set up by municipalities, such as school systems and local governments. These bonds have the distinct feature of issuing tax-free coupon payments to the investors. You do not have to pay federal taxes on this money and in many cases, you also can avoid state and local taxes. Many municipal bonds are set up on a state level. They will invest in municipal bonds from only one particular state so that you can avoid paying taxes on any level. If you invest in a national municipal bond, you might still have to pay taxes on out-of-state income.

When you are in a high income tax bracket, this can be a very attractive investment. When you invest in a traditional bond fund, you have to pay taxes on the interest that you receive as if it were regular income. This provides high income earners with another investment option. 

2. Diversification

Another big advantage of investing in this type of trust is that you can benefit from diversification. The individuals that set up this type of trust utilize their skill in the industry to select municipal bonds that will complement each other. They are from many different areas and many different types of municipalities. This creates an eclectic mix of securities that most individual investors would not consider purchasing together. Most individuals also do not have the money that it takes to buy such a large number of municipal bonds. This creates safety in numbers for the investor. Even if one of the municipal bonds fails, you still have the rest of the portfolio to hold your investment steady, or increase it's value.

3. More Frequent Payments

When you invest in municipal investment trust, you can also benefit from frequent payments. When you invest in individual municipal bonds, you will receive interest payments on a semiannual basis. While these are nice, it might be hard to live off of getting payments two times a year. When you invest in a municipal investment trust, you should be able to receive interest payments every single month.

Municipal bonds are purchased so that will pay at different intervals and allow you to get a regular source of income. Most individual investors do not have the capability to set something like this, however, with the help of the trust, it is possible. This is the ideal type of investment for individuals who are retired, or are planning for their upcoming retirement. 

blog comments powered by Disqus