Fund prices and yield

phuket

I am trying to clarify how the yield of a fund and it's price are related as I have become confused.

According to my understanding if the price of a unit trust increases the % yield will decrease. If I am an income investor and am looking for dividend income the number of units I am able to buy will determine the amount of income I can make.

For example if I want to invest £1000 and the price is £1 a unit now I will get 1000 units. However if in two months time the price goes up to £2 a unit I will only get 500 units. Assuming the dividends won't have changed much in that time, the yield would be halved and I would therefore get half the income.

Is my understanding of this correct?

I asked my financial advisor as I am unsure about drip feeding instead of a one off investment as prices look likely to continue rising and the fund yields will decrease. He tried to explain to me that investing in funds is different from investing in shares (???). The income I will get from funds depends on the amount I am investing not the number of units I purchase.

Can someone explain to me how this could be, it defies all logic to me.

Thanks!

redbuzzard

Seems to me you have it broadly correct.

If the prices of the underlying investments, say shares, held by the fund rises then other things being equal you are right, and that would happen in an income fund (any dividend income would usually be reinvested and add more units rather than increase the price).

The element of price rise in an accumulation fund that is owing to reinvested income will increase unit prices without reducing yield.

The idea of spreading purchases is to reduce risk. Even if the general trend is upwards, a single larger purchase risks coinciding with a spike in the price.

If the price does actually fall over a period, spreading the purchases would buy you more units.

It's usual to suggest putting money in monthly rather than say once a year. If the market/price drops, it's not really a problem in a long term plan - you can console yourself that you will get more shares/units that month, and overall your returns should be smoother.

I'm not sure what your FA could have been driving at when saying funds are different to shares; but one difference is that when you buy shares you know what the price is. When you buy into a fund, it doesn't happen instantly. The price is normally fixed daily and you are never quite sure what price you are buying or selling at, so spreading the purchases averages out those overs and unders against the price you saw when you placed the order.

To assume prices will continue to rise is to increase risk - even though you might turn out to have been right.

When switching investments for a large sum it is also common to spread the dealing, if only over a few days.

If the FA is saying things you don't understand, ask him or her to explain until you do.

Totton

Your FA is correct, the fund dividend is based on the amount invested and not directly the number of units. Of course everything gets worked out per unit as it does for equities per share.

phuket

Totton wrote: »

Your FA is correct, the fund dividend is based on the amount invested and not directly the number of units. Of course everything gets worked out per unit as it does for equities per share.

But dividends are quoted per unit not per investment value so surely if the price of the unit increases and the dividend stays the same the yield decreases as I have noted with the equity funds I am watching?

There are two different views here, anyone care to comment on which view is correct?

srcandas

I think as often both, the confusion is basic definition.

As dividend is a percentage then whether you state it in terms of money in the fund or units in the fund is irrelevant. It is the same.

However if you bought previously at a lower unit price you are getting a greater percentage return based on that original price - a greater yield.

Hope that makes sense. It does to me but that's not saying much :rotfl:

Shaolin_Monkey

It is quite simple - as the unit or share price rises, if the dividend per share/unit stays the same then the yield falls.

With unit trusts, the yield quoted is always a historic figure, based on previous dividend payments. Equities sometimes have projected yield figures available based on a consensus of analyst estimates of future dividends.

phuket

srcandas wrote: »

I think as often both, the confusion is basic definition.

As dividend is a percentage then whether you state it in terms of money in the fund or units in the fund is irrelevant. It is the same.

But aren't fund dividends normally quoted as an amount per unit (the funds I currently have are) rather than a %?

srcandas wrote: »

However if you bought previously at a lower unit price you are getting a greater percentage return based on that original price - a greater yield.

Hope that makes sense. It does to me but that's not saying much :rotfl:

Shaolin_Monkey wrote: »

It is quite simple - as the unit or share price rises, if the dividend per share/unit stays the same then the yield falls.

That was my understanding too.

If I had invested £1000 in December and bought 100 units I WOULD be getting more dividends ie higher yield than if I invested £1000 now and only got 750 units?? (assuming dividends stay the same).

In essence all I am trying to do is make sure I generate the maximum income possible from the ££ I have to invest.

redbuzzard

When an equity fund 'historic yield' is shown it is usually the the last year's income divided by the current price. So if the price increases between one week and the next, if the yield is recalculated it will have dropped.

If it's an accumulation fund you won't see 'income' transactions you'll just see it in the increase of the unit price (part of the increase - capital growth of the underlying holdings is also in there). If its an income fund then you'll see it separately, and if you are reinvesting income then you will see additional units purchased with the income.

If it's a bond fund, yield is usually shown as the average running yield on the holdings - i.e. the annual coupon or interest divided by the capital value.

Does that help?

quotememiserable

An important aspect of gilts and bonds is that the traded rate means nothing once you've bought them, if you hold to maturity. So if you buy a 3% gilt for £105 dated 2020, it will pay £3 per year then £100 in 2020. If you hold to maturity this is what you will get without any doubt. If in the meantime it trades at £80 or £120 it makes no difference to you if you hold it.

redbuzzard

phuket wrote: »

If I had invested £1000 in December and bought 100 units I WOULD be getting more dividends ie higher yield than if I invested £1000 now and only got 750 units?? (assuming dividends stay the same).

If you meant 1000 units, not 100, then you are correct.

For example the historic yield (last year's income/current price) on the Invesco Perpetual Income Fund is lower now in % than it was a year ago when the unit price was lower.

Just as the FTSE yield (the average dividend yield for all shares in the index) goes down when the index rises. The dividends (the numerator) might stay the same in £ per share, but the %age yield drops because the denominator (the aggregate market value of the shares) has got bigger.

phuket

redbuzzard wrote: »

If you meant 1000 units, not 100, then you are correct.

For example the historic yield (last year's income/current price) on the Invesco Perpetual Income Fund is lower now in % than it was a year ago when the unit price was lower.

Just as the FTSE yield (the average dividend yield for all shares in the index) goes down when the index rises. The dividends (the numerator) might stay the same in £ per share, but the %age yield drops because the denominator (the aggregate market value of the shares) has got bigger.

Yes I did mean 1000 units. Thanks Redbuzzard, it seems my logic is correct so I don't know what my IFA was trying to tell me.