153) Distribution Reinvestment for Lower vs Higher Value Units

153) Distribution Reinvestment for Lower vs Higher Value Units

There is a concept where it is better to buy a lower price units compared to a higher value units. How to compare?

You have the same distribution amount and you reinvest the distributions back into the funds. 
You will get more units and more value if the unit price is lower.

Let me explain with an example.

Let's say you invested into 2 funds with $1,000 each.
Fund A at $0.25 per unit and get 4,000 units.
Fund B at $0.80 per unit and get 1,250 units.

The funds declared $0.01 distribution and reinvested.
2 scenarios:

Fund A:
Fund A gives you 4,000 x $0.01 = $40.00
Fund price after distribution =$0.25 - $0.01 = $0.24
$40/$0.24 = 166.67 extra units
Total A units = 4,000 + 166.67 = 4,166.67

After some time, the unit price increased back by $0.01.
Thus fund A unit price is back to $0.25

Total A Value = 4,166.67 units x $0.25 = $1,041.67

Fund B:
Fund B gives you 1,250 x $0.01 = $12.50
Fund price after distribution =$0.80 - $0.01 = $0.79
$12.50/$0.79 = 15.82 extra units
Total B units = 1,250 + 15.82 =1,265.82
After some time, the unit price increased back by $0.01
Thus fund B unit price is back to $0.80
Total B Value = 1,265.82 x $0.80 = $1,012.66


Clearly, Fund A gives you more total value.
From number of units x unit price, you will have more units and higher value from Fund A.

So, what is the issue in this scenario?

It is calculated with different Return Rates.


Fund A was calculated with $0.01/$0.24 = 4.17% returns.

Fund B was calculated with $0.01/$0.79 = 1.26% returns.

This comparison is already biased towards giving Fund A higher returns.
So it is not a fair comparison.

To compare, funds should be based on the annual returns percentage. 
The fund performance reports in Quarterly Fund Reviews do not have the unit prices stated. 
They are always based on percentage returns.

Please consult your Unit Trust Consultant for further information and proper planning. 

More related articles:

Lower vs Higher Unit Price of the Unit Trust Funds
https://highlevelrules.blogspot.my/2018/01/lower-vs-higher-unit-price.html


Benefits of Distribution in Unit Trust:
https://highlevelrules.blogspot.my/2017/11/benefits-of-distribution-in-unit-trusts.html

Difference between Dividend vs Distribution
https://highlevelrules.blogspot.my/2017/11/dividend-vs-distribution.html