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Computing the rate of return of unit trusts

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561

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There is no denying that investing in unit trusts is an excellent way for individuals to get a diversified exposure in the equities market. With 78 local unit trusts available, which do you choose?

One useful guide is to look at the Normandy fund performance tables which are published regularly. They help investors to gauge the performance of unit trust funds. The performance tables attempt to measure the rate of return of the fund. Performance tables are calculated either on a bid-to-bid or offer-to-offer basis.

The bid or buying price reflects the actual amount the fund manager has to work with. It should be noted that the fee portion is not a reflection of the fundís ability in terms of performance. High fees charged do not necessarily reflect the ability of the fund manager. The offer or selling price includes the fees due to the fund manager.

What is the rate of return? How then do you compute the rate of return of unit trusts?

Investors normally encounter difficulties when calculating the rate of return on their unit trust investments particularly when one has to take into consideration income distributions and bonus issues. What happens when you reinvest the dividends?

Take a hypothetical example. Encik Saidi has RM1000 and he invests in Fund X on January 1, 1996. The following sequence of events occured;


Invested RM1,000

Jan 1, 1996

Bid price RM1.00


Fund X unit price

June 30

Bid price RM1.20


The Fund paid a dividend of 10 sen per unit

July 1

Bid price RM1.10


Dividens reinvested

July 1

Bid price RM1.10


Fund X unit price

Dec 31

Bid price RM1.30


The Fund issued bonus on 1-to-10 basis

Jan 1, 1997

Bid price RM 1.18

The bid price is assumed to be fixed at Net Asset Value (NAV) and the buy and sell spread remained at 5 sen. Although the fund paid out a dividend of 10 sen per unit, the price was adjusted downwards by 10 sen (from RM1.20 to RM1.10).

In other words, the extra 10 sen dividend was offset by a drop of a similar margin in the price. The fund then had 1 for 10 bonus issue and the unit price dropped by 12 sen (RM1.30 to RM1.18).

When a unit trust fund declares dividends and bonus issues, what does it really mean? In this case, it made no difference to Encik Saidi whether he invested before or after the declaration of dividends units or bonus. Prices had been adjusted downwards, a normal practice in the industry. Many investors tend to overlook this issue.

In addition, the reinvestment of units mostly involved paying additional fee to the manager. Is it really beneficial to invest just because the Fund is going to pay attractive dividends soon?

The same applies for bonus issues. In this case, a 1-to-10 bonus issue meant Encik Saidi would get an additional ten units for his existing one unit. However, the price was adjusted downwards by 12 sen - the value actually decreased with the bonus issue.

It is not uncommon to see local investors flocking to buy into a fund because of the dividend or bonus issue track record. Donít be mislead, you are not getting a good deal. You just get your own money back when a dividend is paid.