A unitized fund is an investment vehicle where investors' contributions are pooled together and represented by units. These units have a value that fluctuates based on the performance of the underlying assets in the fund.
Are you on the lookout to diversify your investments without the burden of having to manage them yourselves?
Then you can consider tapping into the collective buying power of unitised funds that can generate decent returns and reduce the risks of individual stock investments.
What is a unitised fund?
A unitised fund is an investment vehicle that uses pooled money from various investors to purchase different securities. The assets of the fund are treated as one, to begin with, and then divided into units - each of which together represents the total value of the fund.
How do unitised funds work?
The value of each unit is derived by dividing the total value of the fund by the number of outstanding units. Investors are provided with a daily unitised value for their portion of the investment.
Through unitised funds, you can invest in securities like bonds, stocks, and multiple other financial instruments, giving investors exposure to different asset classes.
Fund managers actively manage these funds to maximise returns and meet the investment objective.
Now that you are aware of the unitised fund meaning, and how it works, let us understand its structure.
Structure of unitised funds
These funds can be structured as open-ended, where new units can be created and redeemed as needed, or closed-ended, where a fixed number of units are issued. The liquidity and investment strategy can vary significantly depending on the structure.
- A portfolio manager who makes buying and selling related investments and defines asset allocation in the fund’s portfolio.
- A unitised fund also has an institution as a custodian to hold assets of the fund for safekeeping.
- For the management, sale, and redemption of sale units, a transfer agent maintains all the investor records.
- Board of Directors/Trustees who oversee the fund’s operations to ensure the fund manager adheres to the fund’s investment objectives and policies.
- An auditor to ensure that regulations are being adhered to and all financial statements comply with regulatory guidelines.
Types of unitised funds
They are of different types based on the types of assets they hold, their structure, and their management styles.
- Mutual funds
These open-ended funds are managed by portfolio managers who invest in multiple securities, like equity, stock, bonds, etc. They can be bought and sold easily at the Net Asset Value (NAV) calculated at the end of each day. - Exchange-traded funds (ETFs)
These open-ended securities are popular amongst investors who want exposure to specific market segments or indices. They are traded on the stock exchange like individual stocks and can be redeemed at any time. - Unit investment trusts (UITs)
These are closed-ended securities managed by a trustee. Only a fixed number of UITs are created and no new issues are made for the specified time frame. Since these aren’t managed actively, they have a lower fee structure. - Collective investment trusts (CITs)
CITs are similar to mutual funds but are exclusively available to institutional investors like pension plans. They benefit from lower administrative costs due to their limited marketing and distribution.
Benefits of investing in unitised funds
Here are some of the advantages of investing in unitised funds.
- More diversified portfolio: Unitised funds provide investors with a diversified portfolio and help them reduce the risk that comes when you only invest in one company or sector. It helps balance the upswings and downswings of the market and delivers consistent returns over time.
- Professional management of funds: Unitized funds are handled by expert fund managers with significant experience who can analyse and understand trends better than an average individual retail investor. It also helps overcome common investor mistakes of buying or selling under panic at the wrong time.
- Provides high liquidity: Unitised funds can be accessed by investors as and when they need them. They are considered to have more liquidity than other financial securities. As a result, an investor can easily buy or sell them if the need arises.
- Is convenient and stress-free: If an investor does not have the time, bandwidth, or expertise it takes to manage different securities, then it is better to have experts manage it for them. With unitised funds this is possible.
Drawbacks of investing in unitised funds
While unitised funds provide quite a few benefits, it is important to be aware of some of the risks that are associated with them:
- Like all securities, unitised funds are also subject to market risk. Any fluctuations in market conditions, changes in rates by central banks, or any geopolitical event will change the unit price and the value of the fund’s underlying assets.
- Another risk is the one that is associated with poor management by fund managers. If they do not select the right funds, do not make buy and sell calls at the right time, or fail to diversify the portfolio, the fund might underperform. Management risk can lead to a loss of the investor’s capital.
- Considered more liquid than other securities, unitised funds still come with substantial liquidity risk. If many investors panic sell their units simultaneously, prices will decline, leading to a liquidity crunch.
- If a fund is disproportionately concentrated in a specific market sector or industry, it can affect the fund’s performance if the said market is affected. Concentration risk can lead to the loss of the fund’s value during downturns, which can lead to underperformance.
How to invest in unitised funds
Unitised funds offer a rewarding way to grow your investments and achieve your financial goals. Here are some pointers to help you make an informed decision before investing in unitised funds:
- Research the unitised fund: Conduct extensive research on the different unitised fund schemes available in the market. Compare its historical performance, management, and fees with your risk tolerance, goals, and time horizon.
- Choose a fund provider: Select reputable firms and open a Demat or mutual fund account.
- Complete your application process: Provide your personal information by submitting a copy of your Aadhaar Card, PAN number, and other financial details.
- Fund your account: Check the minimum requirement amount and transfer the amount as initial investment to purchase the required number of units.
- Monitor regularly: Regularly track your fund's performance and review and rebalance your funds as needed.
Fees and expenses of unitised funds
Unitised funds incur the following fees and expenses:
- Management fees go to the fund manager for managing the investments.
- Administrative fees cover the cost of operations of the fund
- Expense ratio is the annual fee that a fund charges its shareholders, expressed as a percentage of the total assets managed by the fund
- Load fees are paid as the sales charge for the sale or purchase of fund units
Taxation on unitised funds
Unitised funds are subject to the following taxes:
- Capital gains tax which is levied on profits earned from selling units at a higher price
- Dividend and interest tax which is paid on the income and dividends received from fund assets
To calculate your income tax, read about the Income Tax Slabs for FY24-25.
Conclusion
Unitised funds are a great avenue for investors to get the benefits of diversification, expert portfolio management, liquidity, and ease of entry.
However, it is important to be aware of the different risks associated with these funds like market risk, management risk, and liquidity risk.
By selecting the right unitised fund and keeping your risk tolerance preference in mind, you can achieve your financial goals in the long term.
If you are planning to invest in unitised mutual funds, the Bajaj Finserv Mutual Fund Platform is the ideal option.
It will help you compare mutual funds and choose the right mutual fund schemes to meet your financial ambitions. With the SIP calculator and lumpsum calculator, you can make informed decisions about how much to invest and calculate potential returns.
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