If you’re new to investing or looking for ways to diversify your portfolio, you’ve likely come across terms like “mutual funds,” “unit trusts,” or “investment fund units.”
But what exactly is an investment fund unit, and what does it mean for you as an investor?
This guide will demystify these concepts, explaining how fund units work and the rights they grant you.
What is an Investment Fund Unit (or Mutual Fund Share)?
An investment fund unit (often called a share in the context of mutual funds or company-like structures) represents a single, equal portion of an investment fund’s total net assets. When you invest in a fund, you are essentially buying these units or shares.
Defining a “Unit” in Collective Investment Schemes
Collective investment schemes, such as mutual funds or unit trusts, pool money from many investors. This pooled money is then used to buy a diversified portfolio of assets like stocks, bonds, or other securities. Each unit you own represents your proportional ownership in this underlying portfolio.
The Concept of Pooling Investor Money
Imagine a large pie (the investment fund) made up of various ingredients (stocks, bonds, etc.). Each slice of that pie is an investment fund unit. The more units you buy, the larger your “slice” of the overall fund.
How Investment Funds (like Mutual Funds or Unit Trusts) Operate βοΈ
Understanding the mechanics of the fund itself is key to understanding its units.
The Role of the Fund Manager
Each investment fund is managed by a professional fund manager or a team of managers. Their job is to make investment decisions on behalf of all the unitholders, aiming to achieve the fund’s stated investment objectives (e.g., growth, income, or a balance of both).
Diversification: Spreading Risk Across Assets
A core principle of most investment funds is diversification. By pooling money, funds can invest in a wide range of assets.
This means that if one investment performs poorly, its impact on the overall fund value (and thus your unit value) is lessened compared to if you had invested all your money in that single asset.
Calculating Net Asset Value (NAV) per Unit
The price of an investment fund unit is determined by its Net Asset Value (NAV).
- NAV = (Total Value of Fund Assets – Total Fund Liabilities) / Total Number of Units Outstanding The NAV is typically calculated at the end of each trading day. When you buy or sell units in an open-end fund, the transaction usually occurs at that day’s NAV.
What Rights Does an Investment Fund Unit Grant to Investors? βοΈ
Owning units in an investment fund comes with certain rights:
- Right to a Proportionate Share of the Fund’s Assets: Your units represent your claim on the fund’s underlying assets. If the fund is liquidated, you are entitled to your proportional share of the net proceeds.
- Right to Receive Distributions: Depending on the fund, you may be entitled to receive distributions from:
- Income: Such as dividends from stocks or interest from bonds held by the fund.
- Capital Gains: If the fund sells assets for a profit, these gains may be distributed to unitholders.
- Voting Rights (in some cases): For certain types of funds or on specific matters (like changes to investment policy), unitholders may have voting rights, similar to shareholders in a company.
- Right to Information and Fund Reports: Fund companies are required to provide regular reports (e.g., annual and semi-annual reports) detailing the fund’s performance, holdings, and expenses. You also have the right to access documents like the prospectus or Key Investor Information Document (KIID).
Types of Investment Fund Units/Shares π―
Investment funds come in various structures, impacting how their units are traded:
- Open-End Fund Units: Most mutual funds are open-end. This means the fund can create new units when investors buy in and redeem (cancel) units when investors sell. Transactions are typically done directly with the fund company at the NAV.
- Closed-End Fund Shares: These funds issue a fixed number of shares that are then traded on a stock exchange, like regular stocks. Their market price can deviate from their NAV due to supply and demand.
- Exchange-Traded Fund (ETF) Shares/Units: ETFs also trade on stock exchanges like closed-end funds, but they have a creation/redemption mechanism that generally keeps their market price close to their NAV.
- Differentiating Based on Investment Strategy: Funds (and their units) are also categorized by what they invest in, such as:
- Equity Funds (stocks)
- Bond Funds (fixed income)
- Money Market Funds (short-term debt)
- Balanced Funds (a mix of stocks and bonds)
- Index Funds (track a specific market index)
Table: Key Differences in Fund Structures
| Feature | Open-End Mutual Fund | Closed-End Fund | ETF (Exchange-Traded Fund) |
| Unit Creation | Continuous | Fixed number at IPO | Continuous via APs |
| Trading | Directly with fund at NAV | On stock exchange | On stock exchange |
| Price vs. NAV | Priced at NAV | Can trade at premium/discount | Usually close to NAV |
| Typical Fees | Expense ratio, possible loads | Expense ratio, brokerage fees | Expense ratio, brokerage fees |
Advantages of Investing in Fund Units β
- Professional Management: Your money is managed by experienced professionals.
- Diversification: Instant diversification across many securities, reducing risk.
- Accessibility and Convenience: Low minimum investment amounts make them accessible to many.
- Liquidity: Units of open-end funds and ETFs can generally be bought and sold easily on any business day.
Potential Disadvantages and Risks β
- Management Fees and Expenses: Funds charge an expense ratio (an annual fee covering operating costs). Some also have sales charges (loads). These fees reduce your returns.
- No Guarantee of Returns: The value of your units can go down as well as up (market risk).
- Fund Manager Underperformance: A fund manager might not achieve the fund’s objectives or might underperform its benchmark index.
- Lack of Control: You don’t get to pick the individual securities within the fund.
How to Buy and Sell Investment Fund Units π
- Through a Brokerage Account: Most common way. You can buy units/shares of various funds from different companies.
- Directly from the Fund Company: Some fund companies allow you to open an account and invest directly with them.
- Understanding Purchase and Redemption: For open-end funds, purchases (subscriptions) and sales (redemptions) are processed at the next calculated NAV after your order is received. For ETFs and closed-end funds, you buy and sell throughout the trading day at the prevailing market price.
Key Considerations Before Investing in Fund Units π§
- Your Investment Goals and Risk Tolerance: What are you trying to achieve (growth, income, capital preservation)? How much risk are you comfortable taking?
- Reading the Fund’s Prospectus or KIID: These documents contain crucial information about the fund’s objectives, strategies, risks, fees, and past performance.
- Comparing Fees and Past Performance: Lower fees mean more of your return stays with you. While past performance is not indicative of future results, it can provide some context when compared to benchmarks and peer funds.
Conclusion: Are Investment Fund Units Right for You? π§
Investment fund units offer a practical and often effective way for individuals to access a professionally managed, diversified portfolio of assets.
They can be suitable for beginners and experienced investors alike, helping to achieve a wide range of financial goals.
However, it’s vital to understand how they work, the rights they provide, and the associated costs and risks.
By doing your research and choosing funds that align with your personal financial plan, you can make investment fund units a valuable part of your wealth-building strategy.
Frequently Asked Questions (FAQ)
What is NAV and why is it important?
NAV stands for Net Asset Value. It represents the per-unit/share market value of a fund’s assets, minus its liabilities. It’s the price at which open-end mutual fund units are bought and sold and serves as a benchmark for ETFs and closed-end funds.
What’s the difference between a mutual fund unit and a stock?
A stock represents ownership in a single company. A mutual fund unit represents ownership in a diversified portfolio of many different stocks, bonds, or other assets, managed by a professional.
Are my investments in fund units guaranteed?
No, investments in fund units are not typically guaranteed by any government agency (like bank deposits might be). The value of the units can fluctuate with the market value of the underlying assets, meaning you could lose money.
What is an “expense ratio”?
An expense ratio is an annual fee charged by an investment fund to cover its operational costs, including management fees, administrative costs, and other expenses. It’s expressed as a percentage of the fund’s average net assets and directly reduces your investment return.
Can I sell my fund units at any time?
For open-end mutual funds and ETFs, you can generally sell (redeem) your units/shares on any business day at the prevailing NAV or market price. Closed-end funds are also sold on exchanges but depend on a buyer being available. Some funds might have short-term redemption fees.
