A unit trust is a form of investment that gives you affordable and easy access to the financial markets. The money that you invest is grouped with money from other investors who are likely to have similar investment objectives. Investment managers pool all the money and purchase underlying investments which are then divided into equivalent slices called ‘units.’ The units can then be allotted to you based on the amount of money you invested. The unit price may depend on the day on which you make the purchase.
How a unit is priced
A unit within a unit trust can be priced according to an equation: All the assets of a unit trust are made up of shares, bonds, cash and/or property that the unit trust owns on behalf of investors. The value of the assets may be updated daily or weekly, depending on the specific unit trust.
The operating expenses which comprise of trustee and custodian fees, audit fees or their service fee, VAT, and bank charges are transactional costs for buying and selling shares. The operating expenses are subtracted from the assets and can then divided by the total number of units that may have been bought by the investors.
Unit trusts are priced differently to shares
Unit trust prices are unlikely to be equivalent to share prices. Share prices of a stock should be priced according to an agreed upon amount between buyers and sellers at a certain time; herd behaviour and sentiment can influence the price of a stock e.g. should stock market investors purchase excess amounts of a particular stock it can increase the stock’s price. In contrast, should an investor buy large amounts of units of a unit trust, it should have no effect on the price of the unit.
What changes the price of a unit trust?
The value of assets and operating expenses within a unit trust can alter the price. Should an equity unit perform well, then the group of assets inside the unit trust generally increases which in turn, can increase the value of each unit. The same movement can be expected if the investment manager lowers a variable of the operating expenses.
It’s usually not recommended to take advantage of price movement and try time the market. The majority of unit trusts aren’t designed to be traded regularly. Rather, it’s recommended to let the units accumulate in value over a long-term horizon.
How should you compare unit trusts?
The best way to assess a unit trust is to
- Identify how the price per unit has grown by looking at fund factsheets.
- Consider the operating expenses; they should be relative to the fund’s performance.
- In addition, determine the amount of risk you’re willing to take and make sure that the unit trust’s mandate meets your financial goals.
Monitoring a unit trust
Try and avoid watching the unit price frequently; it can be meaningless to a long-term investor. Rather, review your investment performance at set intervals to determine whether it is still meeting your needs.
If you are interested in investing in unit trusts, it’s best to speak to an independent financial adviser who can assist in determining which funds suit your goals.