Municipal Investment Trust (MIT)
What it is:
How it works (Example):
Most MITs require a minimum investment of $1,000 to $5,000. Investors can purchase and sell shares through a broker (who often charge commissions) in the secondary markets. Like mutual funds, a MIT has a public offering price and a net asset value that is calculated every day. MIT share prices can change every day, and it is important to remember that like all fixed-income securities, MITs are affected by changes in interest rates -- when rates rise, the prices of the underlying bonds fall and when rates fall, the bond prices rise.
MITs are not mutual funds. The biggest difference between the two is that MITs hold their securities until they mature, whereas mutual funds trade the securities in their portfolios. This means the MIT investor always knows what securities are in the portfolio, when they mature, and what the expected income stream is at the time of his or her investment. Management fees are also different. MITs often charge a one-time, up-front fee, but mutual funds charge a fee every year. Depending on the difference in fees, holding MIT shares for several years can be less expensive than holding shares of most mutual funds.
If the bonds in a MIT are called, the par value of the MIT falls and the principal is given back to the investors. Likewise, when a bond makes a coupon payment, this too is passed directly on to investors. This is different from a mutual fund -- it would reinvest the principal and interest in additional securities.
Details about the creditworthiness of a MIT are detailed in its prospectus. Some MITs purchase insurance policies that guarantee the timely payment of interest and principal; these MITs often carry lower yields than uninsured MITs.
Why it Matters:
MITs are another way to invest in a basket of municipal bonds. They have three main advantages:
1) and Convenience -- Buying just one municipal bond often requires a $5,000 minimum investment. For the same amount, a MIT investor can get exposure to tens or dozens of municipal bonds that were researched and chosen by professionals. The diversification helps minimize credit risk, and the MIT handles the administrative tasks of collecting and disbursing the income.
2) More Certainty -- Because a MIT holds securities until maturity, investors know up-front when they'll get their original investments back and what to expect for a return. This can be especially helpful to income investors, who may need steady cash flows for college tuition, retirement, or other defined investment goals. In some cases, MITs pay interest and/or principal monthly rather than semiannually, which is also helpful for investors who need steady, frequent income.
3) Taxes -- One of the biggest advantages of investing in municipal bonds is their favorable tax treatment. Investors should carefully study a MIT's holdings. Some MITs buy munis in just one state, allowing investors of that state to take full advantage of the tax exemptions associated with those securities. For example, New Mexico residents who invest in an Arizona-only MIT may have to pay state and local taxes on interest from the MIT. However, Arizona residents who invest in an Arizona-only MIT do not.