Unit trusts and OEICs
Introduction|
Course|
Q&As |
Recommended reading|
Quiz |
61
2. What is a unit?
A 'unit' in a unit trust represents
an equal fraction of the fund owned by the trust.When you invest in a unit trust, the number of units you are allocated is calculated by dividing the amount you invest by the 'offer price' at the time. So if the offer price is £2.50, an investment of £1,000 will buy 400 units.
The offer price is not fixed but rises and falls in line with the value of the trust's assets.
- If the trust's assets rise in value, so will the offer price of its units.
- If the trust's assets fall in value, so will the offer price of its units.
Simple!
Most unit trusts issue two classes of units:-
- income or distribution units which pay dividends and other income on set dates in the year.
- accumulation units which roll up dividends and other income within the fund.
Note that the number of units in issue is not static, which is why unit trusts are often referred to as 'open ended'. The fund managers can create new units or cancel existing ones according to demand from buyers and sellers.
- Investors buy units from fund managers and, if they later decide to turn them back into cash, they sell them back to the fund managers.
- The fund managers can accumulate units that have been sold back to them (in a 'box'), cancel them or sell them on to new investors in the fund.
Recommend Reading
