What it means
Imagine a fund worth $80,000,000 with many investors. Without units, it would be hard to say what each person owns after others have joined, left or topped up.
Dividing the fund into units solves this, because each unit has a price and each investor holds a count of units. The unit price is found by dividing the fund's net asset value by the number of units in issue.
A new investor buys units at that price, so existing investors are not disadvantaged. Someone who leaves sells units back at the then current price, and their units are cancelled.
Unitised funds are widely used inside life insurance and pension products, where the policyholder's value is tracked in units of one or more funds. They also underlie unit trusts, mutual funds and many other collective schemes.
A policy or pension account statement may show the units held, the unit price and the total value. The method makes performance simple to measure.
If the unit price rises from $2.00 to $2.20, the fund has grown by 10%, ignoring charges and distributions. Investors can compare this with other funds and with benchmarks, which are reference indices used to judge performance.
Charges are usually taken by adjusting the unit price or by cancelling units, so investors should check how and when fees are applied. In some funds, a dilution adjustment or swing pricing is used to protect remaining investors from the costs of large inflows and outflows.
These details vary, so the fund documents give the exact rules. Unitisation also supports smooth operations for the fund manager.
Investors can pay in small, regular amounts and receive fractions of a unit, which makes monthly pension contributions and savings plans easy to administer. The fund's accountants only need to calculate one price per fund each valuation day, rather than a separate figure for each investor.
In practice
Real-world examples.
Example
A pension scheme member holds 12,000 units in a balanced fund. Each month, the pension provider converts her contribution of $400 into units at the day's price, so she buys more units when prices are low and fewer when prices are high.
Example
A life insurer offers policyholders a choice of three unitized funds. A policyholder switches 5,000 units from the equity fund into the bond fund as retirement nears, and the insurer cancels and creates units at the day's prices.
Example
A charity invests $300,000 in a unitized property fund. At the year end, the finance officer multiplies the units held by the published price to report the value in the accounts.
Formula
Calculation
Unit price = net asset value of the fund / number of units in issue
Units bought = amount invested / unit price
A unitized fund has a net asset value of $80,000,000 and 40,000,000 units in issue, so the unit price is 80,000,000 / 40,000,000 = $2.00. An investor who puts in $5,000 receives 5,000 / 2.00 = 2,500 units. Later, the fund's value rises to $88,000,000 with the same number of units, so the price becomes 88,000,000 / 40,000,000 = $2.20, and the investor's holding is worth 2,500 x 2.20 = $5,500.Case study
Seen in the real world.
Meridian Pensions is an illustrative, fictional provider that managed a growth fund worth $120,000,000. At the start of the year, the fund had 60,000,000 units priced at $2.00.
During the year, members added $12,000,000 in contributions at an average price of $2.10, creating about 5,714,000 new units. The fund's investments also rose in value, taking the fund to $150,000,000 with 65,714,000 units, so the price at year end was about $2.28.
A member who had held units from the start saw a gain of about 14%, regardless of when others joined. The illustrative lesson is that the unit price is the key measure, because it adjusts for new money coming in and out and shows performance fairly. She also noticed that her monthly contributions had bought more units while prices were lower, which helped her average cost.
Watch out
Common mistakes.
- Comparing the total fund size from year to year to judge performance, when inflows and outflows change the size without reflecting returns.
- Assuming that the number of units you hold changes with performance, when it is the unit price that rises or falls.
- Ignoring charges taken by cancelling units, which reduce the holding without any visible cash payment.
Questions
People also ask.
Why use units instead of just recording the value?
Units make it easy to track each investor's share fairly when many people join and leave at different times.
Does buying more units mean I own more of the fund?
Yes, your share is the units you hold divided by all units in issue.
How often is the unit price calculated?
Many funds value daily, though some, such as property funds, may do it less often.
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