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Buying units in a fund
How it works when you invest in a fund, maybe for your pension or ISA.
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Buying units in a fund
It is easy to understand about buying property. You pay a price for it and when you come to sell it, you hope to get more than you paid for it.
That in essence is the same principal as buying units in any unitised fund, be it for your pension or other savings such as an ISA. You buy units in your chosen fund, and when you come to sell them you hope that they are worth more than you paid for them.
Let's say you have decided to invest your money in a UK equity fund. That fund will be divided into a certain number of units. If each unit was priced at £1 and you paid in £50, you would buy 50 units.
Most unit prices change daily. If you paid in £50 the day before and the price of each unit was only 90p, then you would have bought 55 units. If the unit price was £1.10, you would have bought only 45 units.
You can see from this that the lower the unit price, the more units you can buy. If the unit price is higher then you will be buying fewer units.
Valuing your account
The value of your investment account depends on the price at the valuation date.
Keeping with the above example, let's say you have bought 50 units and that today the unit price has gone up to £1.25. The value of your account will be £62.50.
Investing at the right time
If you were buying a property you know that the best time to buy is during a slump when property prices are low. Well, it's just the same when investing in unitised funds. If the financial markets are not doing very well, unit prices will be lower, so you will be buying more units.
If the financial markets are doing well, then unit prices will be higher and you will be buying fewer units.
Selling at the right time
If you invested in a pension plan there will come a time when you want to retire. If you have an ISA you may want to cash it in. When unit prices are low, the value of your account will also be low. When unit prices are high, you will have more in your account.
Let's look at some examples.
1. Katie decides to invest £5,000 in an ISA. She buys units in the XYZ equity fund. On the day she invests the money, the unit price is £4. She buys 1,250 units.
A year later she gets a valuation statement. The unit price has fallen to £3 so her account is worth £3,750. Less than she paid in. This has hurt Katie but as she does not need the money she takes no action.
After a few years Katie decides to cash in her ISA to go travelling. The markets have done well recently and the unit price has risen to £5. She cashes in her ISA and receives £6,250. Katie is happy as her investment has done well.
2. Mark has £3,000 to invest in an ISA. He decides to buy units in the OPQ overseas equity fund. On the day he invests his money, the unit price is £2. He buys 1,500 units. Mark buys more units than Katie even though he has less to invest because the unit price is lower.
A year later he gets a valuation statement. The unit price has risen to £3 so his account is now worth £4,500.
Mark decides he needs to cash in his ISA to pay for some urgent house repairs. Unfortunately, this coincides with a dip in the financial markets and the unit price has fallen to £1.50. When he cashes in his ISA he only receives £2,250. Less than he paid in.
If only we had a crystal ball
Life is unpredictable, so it is impossible to tell whether you will get back more from your investment than you paid in. Perhaps the moral in the story is, don't put all your savings in one basket, you may get back less than you invested if have to suddenly cash them in at a bad time.
Source: Time For Money