133) Benefits of Distribution in Unit Trusts
Below are some benefits you get from Distribution of a Unit Trust Scheme.
1) Reduce Fund Price
The fund price is managed to be within a certain price range.
As the fund assets continuously grow form the shares, bonds and money market
instruments. The fund manager will do their best to increase the values of
their portfolio. If no distribution was
declared, the fund price will keep on increasing in the long term
For example, a fund with the unit price of $1.00 gives a
distribution of $0.10 after the market closes. The fund price will be $0.90 on
the next day’s market open. Thus, the
fund price had been reduced to below $1.00.
Let's assume the fund had a total return of 50% after 5
years. The initial $1.00 fund will now be valued at $1.50 ($1.00 Capital + $0.50
Growth). Do you think it will be able to attract more investments when priced
at $1.50?
Most investors will perceive the fund as expensive after the
50% increase. It will encourage selling of
the funds. It will also be difficult to get new investments money.
By declaring distributions regularly, the unit price can be
maintained to be below $1.00.
In fact, there are some investors who “think” that the fund
is cheap again after distribution. So, it is time to buy more after
distribution.
2) Maintain
Investment Capital
There are also investors who would not touch the capital invested. This is their way of ensuring
the Capital Preservation. They will
enjoy the distribution pay out and never affect the investment.
The concept is that you can do whatever you want with the
distribution amount, but NEVER TOUCH
the Capital. It is like you had planted a tree and now the tree is giving fruits.
You can eat the fruits, but never touch, trim or cut the tree.
It is also used for Trust or in a Will. The investor would not
want the children to take away and reduce the investment capital. The children
can only receive the distribution pay out as benefits to be utilised. This will
ensure the capital remains invested for a long time.
There are also Trust made for Charitable Foundations. Only
the distribution pay out amount can be used to benefit others. The Capital remains
under the Foundation's assets.
3) Build Confidence
When a fund is declaring distribution, it is "telling" the investors that the fund is making money. By declaring distributions, it gives confidence to the investors that the fund is performing.
By regulations, distribution can only be used from:
a) realized capital gain from the asset trading
b) received dividends from stocks
c) received coupon payments from bonds
d) received interest from the money market instruments
Distributions are made after considerations below:
a) Total returns & Income for the year
b) Cash flow for distribution
c) Stability & sustainability of the distribution
4) Free Insurance
There are some funds that provide Free Life Insurance for
the investor. The insurance coverage is at $1.00 per unit. When there is
distribution and be reinvested, the distribution money will purchase more
units. Thus, the investor will get more
insurance coverage after each distribution.
However, the insurance coverage remains the same if the
coverage is based on NAV of the fund. This is because Total NAV remains the same before and after the distribution.
5) Gold Investor
Status
There also some funds that provide extra benefit to their
investors. For each invested amount, the investor will get points. When the
investor had accumulated a certain number of points, his/her status is upgraded
to Gold Investor Status.
The points will increase when there are new money invested.
However, points will be deducted for redemption. Distribution pay out does not
reduce the points.
In this way, the investor can get some money back via distribution
and yet still maintain the points. So, the investor can remain as a Gold
Investor status while receiving money regularly.
6) Easier Transactions
There are some transactions that require minimum number of units. For example, minimum 1000 units for switching to another fund. By having more units at a lower price, it will be easier for small investors to do those transactions. A fund with $0.25 per unit only requires minimum value of $250 to do switching. Compare to a fund worth $1.00 each unit, you need at least $1000 to switch. Funds with more units at a lower price will be more flexible.
6) Easier Transactions
There are some transactions that require minimum number of units. For example, minimum 1000 units for switching to another fund. By having more units at a lower price, it will be easier for small investors to do those transactions. A fund with $0.25 per unit only requires minimum value of $250 to do switching. Compare to a fund worth $1.00 each unit, you need at least $1000 to switch. Funds with more units at a lower price will be more flexible.
Many investors prefer unit trusts to investing in the stock market because of too many benefits as they get a chance to invest in a diversified portfolio and also they get profit of better management of financial experts for an affordable trading portfolio with a minimum risk.
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