WHAT IS UNIT TRUST (PART 3)

CHAPTER 1
WHAT IS UNIT TRUST?
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How does a Unit Trusts Work – From the Fund’s Perspective
How does a Unit Trusts Work – From the Investors’ Perspective
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How Does a Unit Trust Work – From the Fund’s Perspective

When you invest in a unit trust, you invest by buying the “units” of the fund. The value of each unit changes together with the Net Asset Value (“NAV”) of the fund. Below is an example of how it works.Let’s say on 1 January 2016, a unit trust known as Dynamic Equity Fund was started. Usually, when a fund starts, the value of each unit will be priced at RM1.00.At inception, Dynamic Equity Fund received subscriptions worth RM5 million and a total of 5 million units of the fund is distributed. Why 5 million units are given out is because the value of each unit is priced at RM1.00. Table 5 below shows Dynamic Equity Fund’s transaction on 1 January 2016.

Table 5: Inception of Dynamic Equity Fund
Net Asset Value(NAV) – RM	5,000,000
No. of units – units	5,000,000
NAV per unit – RM	1.0000

 

NAV, or Net Asset Value, represents the total net asset of the fund, which is equal to the value of the total investment (including stocks, cash held, and receivables) minus liabilities (including payables).

With the RM5 million raised, Dynamic Equity Fund will utilise the proceeds to invest in the stock market. Investors need to know that the investment that Dynamic Equity Fund is allowed to make is subjected to the objective of the fund. For instance, if the objective of the fund is to invest in Malaysia-listed companies, then the fund can only invest in companies listed in Malaysia.

Let’s say Dynamic Equity Fund invested RM1 million each in Companies A, B, C, D, and E on 2 January 2016, as shown in Table 6.

 

Table 6: Dynamic Equity Fund’s Initial Investment
	Amount invested by Dynamic Equity Fund – RM (a)	Share price @ 2 Jan 2016 – RM (b)	No. of shares owned (a ÷ b)
Company A	1,000,000	1.00	1,000,000
Company B	1,000,000	2.00	500,000
Company C	1,000,000	2.50	400,000
Company D	1,000,000	3.20	312,500
Company E	1,000,000	4.00	250,000
NAV	5,000,000

 

Note: For illustration purposes, we are using 5 companies as an example to ease calculation but in reality, the regulatory requirement prohibits a unit trust fund to invest more than 10% of its funds into a single company.

Assume that at the end of the day of 3 January 2016, the share prices of both Company A and Company B increased by RM0.20, whereas the share price of Company E decreased by RM0.10.

 Table 7 shows the impact of the movement in the share prices on Dynamic Equity Fund.

 

Table 7: Dynamic Equity Fund’s NAV as at 3 January 2016
	No. of shares owned (a)	Share price @ 3 Jan 2016 – RM (b)	NAV (a x b)
Company A	1,000,000	1.20	1,200,000
Company B	500,000	2.20	1,100,000
Company C	400,000	2.50	1,000,000
Company D	312,500	3.20	1,000,000
Company E	250,000	3.90	975,000
NAV			5,275,000
No. of units			5,000,000
NAV per unit (RM)			1.0550

 

The total value, or NAV, of Dynamic Equity Fund is RM5,275,000 as at day-end of 3 January 2016. Remember that there are 5,000,000 units of Dynamic Equity Fund being issued to investors. Thus, the NAV per unit of Dynamic Equity Fund would be RM1.055 (RM5,275,000 ÷ 5,000,000 units).

Continuing with the Dynamic Equity Fund example, Table 8 shows Dynamic Equity Fund’s position on 30 March 2016.

 

Table 8: Dynamic Equity Fund’s NAV as at 30 March 2016
	No. of shares owned (a)	Share price @ 30 March 2016 – RM (b)	NAV (a x b)
Company A	1,000,000	1.50	1,500,000
Company B	500,000	1.90	950,000
Company C	400,000	2.80	1,120,000
Company D	312,500	3.50	1,093,750
Company E	250,000	3.50	875,000
NAV			5,538,750
No. of units			5,000,000
NAV per unit (RM)			1.1078

 

How Does a Unit Trust Work – From the Investors’ Perspective

Now, assume that you are one of the investors who intended to invest RM1,000 in Dynamic Equity Fund on 1 January 2016. It is important to know about the charges involved in the process of buying into a unit trust fund.

Why? Because these charges are part of the investment cost. Given two unit trust funds generate 10% return over a one-year period, the fund that imposes a 3% charge on its investors is deemed more attractive than another that imposes a 5% charge.

For unit trust investments, there is usually an upfront sales charge from zero percent (during promotion or waiver of charges) up to 5% (or higher depending on the funds).

In our example, we will assume the sales charge for Dynamic Equity Fund is 3%. The net amount invested into the fund would be RM970 (i.e., RM1,000 – RM30 sales charge). Following the calculation of Dynamic Equity Fund as discussed earlier, at the end of 1 January 2016, the fund’s NAV is RM1.00. Table 9 shows the number of units that you would have received from your investment into Dynamic Equity Fund.

 

Table 9: Your Investment Position in Dynamic Equity Fund
Date	Amount invested / (redeemed) (a)	NAV (b)	Units received / (redeemed) (a ÷ b)	Total units
1 Jan 2016	RM970	RM1.0000	970.00	970.00

 

On 3 January 2016, you decide to invest another RM2,000 into Dynamic Equity Fund. After netting off the 3% sales charge, your net investment into Dynamic Equity Fund would be RM1,940. As calculated in Table 7 earlier, the NAV per unit of Dynamic Equity Fund on that day is RM1.0550. Table 10 shows your new investment position in Dynamic Equity Fund.

 

Table 10: Your Investment Position in Dynamic Equity Fund
Date	Amount invested / (redeemed) (a)	NAV (b)	Units received / (redeemed) (a ÷ b)	Total units
1 Jan 2016	RM970	RM1.0000	970.00	970.00
3 Jan 2016	RM1,940	RM1.0550	1,838.86	2,808.86

 

Referring to Table 8, the NAV of Dynamic Equity Fund as at 30 March 2016 is RM1.1078. With 2,808.86 units, the value of your investment is now worth:

Value of your investment

= 2,808.86 units X RM1.1078

= RM3,111.66

Your return would be:

 

=	Latest value – Cost	X 100%
	Cost
=	RM3,111.66 – RM3,000	X 100%
	RM3,000
=	3.72%

 

You may be wondering why we are using RM3,000 as your cost in the calculation and not RM2,910 (i.e., RM970 + RM1,940) as shown in Table 10.

The reason is that RM3,000 is your actual cost of investment. Your investment recorded in the statement is after netting off the 3% sales charge. Thus, when measuring your return, you should use your actual cost of investments, i.e. before deducting any sales charges.

On 30 March 2016, you decide to withdraw RM800 from Dynamic Equity Fund. Based on the calculation in Table 8 earlier, the NAV per unit of Dynamic Equity Fund as at 30 March 2016 is RM1.1078.

Table 11 shows your updated investment in Dynamic Equity Fund.

 

Table 11: Your Investment Position in Dynamic Equity Fund
Date	Amount invested / (redeemed) (a)	NAV (b)	Units received / (redeemed) (a ÷ b)	Total units
1 Jan 2016	RM970	RM1.00	970.00	970.00
3 Jan 2016	RM1,940	RM1.0550	1,838.86	2,808.86
30 Mar 2016	(RM800)	RM1.1078	(722.15)	2,086.71

 

This is only a simple example to highlight how unit trusts work in the perspectives of the fund and the investors. For a more detailed explanation, do consult certified financial advisors, and they would be able to give a more detailed explanation on the inner workings.

 

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