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 asset value.
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.
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