133) Benefits of Distribution in Unit Trusts

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. 

In conclusion, every fund has its own benefits which is not listed here. Please consult your Unit Trust Consultant on the other benefits.