Last updated
- February 25, 2022
- 8:57 am
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Unit Trusts is also known as a mutual fund in the United States. It is a collective investment instrument that allows investors with a similar investment objective to pool their money into a fund. The fund manager will use the fund to invest into portfolio assets like equity, bond, money market, and other securities. Unit trust fund consists of 3 parties. The unitholder, fund manager, and trustee. The return on investment in the form of distribution and capital appreciation.
Fund Manager
The role of the fund manager is to implement a fund investment strategy and manage its portfolio activities.
Trustee
A trustee usually is a company that safeguards the asset of the fund. The role of the Trustees is assigned to ensure that the fund manager runs the fund following the fund’s investment objectives.
Unit Holders
The unit holder is the investor who invests in the fund. They hold the rights to the trust’s assets.
Distribution
The investor will get a distribution from the fund account that he invested based on the number of units. Not every fund is compulsory to declare distribution. Some of the funds declare distribution incidentally and some are compulsory. All these subjects to the respective fund characteristic. Investors require to check back the investment prospectus or investment approved material to understand the fund distribution rule.
If the fund has distribution, the investor can either choose to pay out or can choose to reinvest back into the fund. Generally speaking, reinvesting back will not cause any sales charge to be imposed on distribution reinvestments.
As for pay-out distribution can be one of the useful methods to fund regular retirement expenses. An investor can initially choose to reinvest the distribution in the early stage of his age as part of the retirement plan. When comes to retirement age, the investor can change the option to payout distribution for funding his retirement expenses and keeping the capital intact. I will share more on retirement planning in another separate article.
Capital Appreciation
Capital appreciation is also known as a capital gain. It is an increased value of investment between the purchase price and the current market price or selling price.
When the purchase price has been increased to the current market price also known as Net Asset Value (NAV) in the unit trust. If the investor has not sold off the invested units, that gain is known as paper gain.
When the purchase price has been increased and the investor has disposed of the units or selling off the units with the higher selling price. That gain is known as realized gain.
Example 1: Paper Gain
Assume that Purchase Price is 1.00 and the Current Market Price is 1.50
Paper Gain = 1.50 – 1.00
Paper Gain = 0.50
Example 2: Realised Gain
Assume that Purchase Price is 1.00 and the Selling Price is 1.60
Realised Gain = 1.60 – 1.00
Realised Gain = 0.60
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