A unit trust is a pool you own a slice of

You will be able to explain how a unit trust works, how NAV per unit is calculated, and why you do not know your price when you order.

Suppose two hundred people each want to own a little of a hundred different companies. Buying a hundred shares each would cost them a fortune in fees and a lot of paperwork. So they pool their money, hire a professional to buy the shares, and divide the pool into equal slices. Each person owns slices in proportion to what they put in. That, stripped to its bones, is a unit trust.

Here is the definition you will use for the rest of the course: a unit trust is a pooled fund in which investors buy units, each unit representing an equal share of everything the fund holds. A fund manager decides what to buy and sell within the rules in the fund's documents. A separate trustee, usually a bank or trust company, holds the assets for the investors and checks that the manager keeps to those rules. Splitting the jobs between two companies means the person choosing the investments never has sole control of the money.

In Singapore, a unit trust offered to the public generally has to be authorised or recognised by MAS, and must come with a prospectus and a Product Highlights Sheet. Authorisation is not a stamp of quality. It means the fund meets the rules on structure and disclosure. It says nothing about whether the fund will make money or whether its fees are fair.

Now the price. A unit trust does not trade on an exchange the way a share does. Instead, at the end of each dealing day the fund works out its net asset value, or NAV: the market value of everything it holds, minus what it owes, such as fees due to the manager. Divide that by the number of units in issue and you get the NAV per unit, which is the price for that day.

Take a simple example. A fund holds investments worth S$100 million, owes S$0.5 million in fees and expenses, and has 49.75 million units in issue. Its NAV is S$99.5 million, and its NAV per unit is S$2.00. If you invest S$1,000 and pay no charges, you receive 500 units. If prices rise so that the NAV per unit reaches S$2.20, your 500 units are worth S$1,100.

Most unit trusts in Singapore use forward pricing. When you place an order, you do not know the price you will get, because it is the NAV calculated at the next valuation point after your order arrives. Orders received before the dealing cut-off time are usually priced that day. Orders after it wait for the next one. This stops anyone from buying at a stale price after news has moved the market, and it is why your confirmation shows the price a day or two after you click buy.

Charges come out at two points. Some are taken when you buy, such as a sales charge, which reduces the money that actually goes into the fund. If the fund above had a 3% sales charge, your S$1,000 would put S$970 to work and buy 485 units, not 500. Other charges come out of the fund every day, such as the management fee, and you never see a bill for them. They show up only as a slightly lower NAV than the fund would otherwise have. Module 2 goes through every charge in turn, because the ones you never see are often the ones that cost most over time.

One more thing to notice. Owning units is not the same as owning the shares inside the fund. You cannot vote at the companies' meetings, and you cannot take out one share you particularly like. In return, you get diversification and someone else doing the work, at a price. The whole of this course is about judging whether that price is worth paying.

Your task for this lesson: find the factsheet for any unit trust you hold or have been offered. Write down its NAV per unit on a recent date, the name of the manager, the name of the trustee, and the dealing cut-off time if it is stated. If you cannot find the trustee on the factsheet, look in the prospectus. You will use the same fund in lesson 1.4.

Find the factsheet for one fund you hold or have been offered and write down its NAV per unit, manager, trustee and dealing cut-off time.

Course

• Unit trusts, robo-advisors and managed money compared