What it means
When many investors pool their money, the fund divides ownership into equal units so that each person's share can be measured easily. The number of units a person holds, compared with the total in issue, shows their stake.
A holder of 1% of the units is entitled to 1% of the fund's income and assets. Unitholders usually receive income in the form of distributions, which are payments made from the interest, dividends or rent that the fund earns.
They can take the cash or reinvest it to buy more units. They also benefit if the value of the underlying assets rises, which increases the price of each unit.
The rights of unitholders are set out in the trust deed and the fund documents. They commonly include the right to receive reports, to vote on major changes such as altering the fund's objectives, and to redeem units at the fund's value in open-ended funds.
In a listed trust, they may sell units on a stock exchange instead. A unitholder does not usually control day-to-day investment decisions.
The manager chooses the investments, and a trustee or custodian holds the assets and protects unitholder interests. That separation is a protection, but investors must still read the objectives and the charges.
Tax treatment depends on the type of fund and the country. In many systems, the fund passes its income through to unitholders, who are then taxed on it personally, even if the income is reinvested.
Corporate unitholders should check how distributions and gains are recorded in their accounts, since the treatment can vary. In some structures, such as a real estate investment trust, units are listed on a stock exchange and traded like shares.
The price then depends on supply and demand, so it may be above or below the net asset value, which is the underlying value of the assets divided by the units. A unitholder who needs to sell quickly may have to accept a discount.
In practice
Real-world examples.
Example
An engineer invests $25,000 in a unit trust and receives 2,500 units at $10 each. Each year she receives a distribution and chooses to reinvest it, so the number of units she holds grows.
Example
A pension scheme is the largest unitholder in a property fund and votes at the unitholder meeting against a proposal to increase the manager's fees. The proposal needs a majority, and the pension trustees' vote helps to defeat it.
Example
A company holds units in a bond fund as part of its treasury portfolio. At year end the finance team values the units at the published price and records the change in value in its accounts.
Formula
Calculation
Value of holding = units held x net asset value per unit
Ownership share = units held / total units in issue
A unitholder owns 20,000 units in a fund that has 2,000,000 units in issue, and the net asset value is $12.50 per unit. The value of the holding is 20,000 x 12.50 = $250,000, and the ownership share is 20,000 / 2,000,000 = 1%. If the fund distributes $600,000 of income, the unitholder's share is 1% x 600,000 = $6,000.Case study
Seen in the real world.
Eastbourne Retail Property Fund is an illustrative, fictional trust with 10,000,000 units owned by about 3,000 unitholders. The manager proposed buying a new shopping centre funded by issuing additional units at a discount.
A group of unitholders objected, because the new units would dilute their share of income. At the meeting, the manager explained that the purchase would add rental income of $3,000,000 a year, and provided figures for the effect on income per unit.
Unitholders voted to approve a smaller issue at a price closer to net asset value. The illustrative lesson is that unitholders have a real voice in major decisions, and that income per unit, rather than total income, shows whether a deal helps them. The manager also agreed to send unitholders a one-page summary of income per unit after every major transaction.
Watch out
Common mistakes.
- Assuming a unitholder owns the fund's assets directly, when the trustee holds legal title and the unitholder holds a beneficial interest.
- Ignoring reinvested distributions when calculating tax, because income is often taxable even if it is not paid out as cash.
- Believing a unitholder controls investment decisions, when the manager makes them within the fund's objectives.
Questions
People also ask.
Is a unitholder the same as a shareholder?
No, a shareholder owns part of a company, while a unitholder owns part of a fund, although both can receive income and gains.
Can unitholders vote?
Often yes on major matters such as changes to the fund's objectives or manager, according to the trust deed.
How do I find the value of my units?
Multiply the number of units you hold by the latest net asset value per unit published by the fund.
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