221) Average Cost Per Unit Differences

What is the effect on the Average Cost Per Unit (ACU) from Buying at Lower Cost vs After Distribution?

Let us study the case studies below:

Case A:
On 1st January, Adam used $1000 to invest into Fund A at $1.00 per unit.
On 1st June, Adam used another $1000 to invest into the same fund at $0.80 per unit.
What is the ACU in July?

1st January: $1000/1.00 = 1000 units.
1st June: $1000/0.80 = 1250 units.
Total Investment = $1000 + $1000 = $2000.
Total Units = 1000 + 1250 = 2250 units.

Fund A ACU = $2000/2250 = $0.8889 per unit

Case B:
On 1st January, Bob used $2000 to invest into Fund B at $1.00 per unit.
On 30th June, the fund declared $0.1111 distribution per unit.
What is the ACU in July?

1st January: $2000/1.00 = 2000 units.

Total Investment = $2000.
Total Units = 2000 units.

On 30th June, Fund B declared $0.1111 distribution per unit.
New Unit Price (ex-Distribution) = $1.00 - $0.1111 = $0.8889

Distribution Amount = $0.1111 x 2000 = $222.20
Distribution Reinvestment = $222.20/0.8889 = 250 units
Total Units = 2000 + 250 = 2250 units.

Fund B ACU = $2000/2250 = $0.8889 per unit

Is there any Difference? What is the Difference?

Although both funds have ACU of $0.8889 per unit, the actual $ value, the total Net Asset Value (NAV) is different depending on the other information.

Use the Formula:
Total NAV = Unit Price x Number of Units.

Fund B:
It was shown that Fund B unit price is still $1.00 before distribution. 
Distribution is $0.1111.
After the distribution, the Unit Price is lowered to $0.8889.

So Bob now has $0.8889 x 2250 units = $2000.

That is SAME AS BEFORE. No Gain, No Loss.

Fund A:
The total NAV depends on the current Unit Price of Fund A in July.
If the Unit Price is higher than $0.8889, then Adam is making money.

Let's assume the current Fund A Unit Price is $1.00. 
So Adam now has $1.00 x 2250 units = $2250.
That is a GAIN of $2250 - $2000 = $250.

Now, let's assume the current Fund A Unit Price is $0.70.
So Adam now has $0.70 x 2250 units = $1575.
That is a LOSS of $1575 - $2000 = -$425.

Now, let's assume the current Fund A Unit Price is $0.8889. 
So Adam now has $0.8889 x 2250 units = $2000.
That is SAME AS BEFORE. No Gain, No Loss.

Now, let's see what happens if both Adam and Bob invested in the same fund in the same period.

On the 30th June, before the distribution:
Bob has 2000 units at $1.00 each.
Adam has 2250 units at $1.00 each.

On the 1st July, after the distribution:
Bob has 2250 units at $0.8889 each. Total = $2000.

How about Adam? Let's calculate.
Distribution Amount = $0.1111 x 2250 = $250
Distribution Reinvestment = $250/0.8889 = 281.25 units
Total Units = 2250 + 281.25 = 2531.25 units.
Adam has 2531.25 units at $0.8889 each. Total = $2250.

Conclusion:
It is more important to have lower ACU due to buying at lower prices, especially during Market Downturn.  

The Total NAV will be HIGHER if Unit Price goes higher than the ACU.

Not to depend on distribution to lower the ACU. The Total NAV remains the SAME before and after Distribution.


More readings: 


What are the Benefits of Dollar Cost Averaging?
http://highlevelrules.blogspot.com/search?q=dca
Dividend vs Distribution.
https://highlevelrules.blogspot.com/2017/11/dividend-vs-distribution.html

Distribution Reinvestment for Lower vs Higher Value Units
https://highlevelrules.blogspot.com/2018/03/distribution-reinvestment-for-lower-vs.html