7A.5 Unit Splits, Distributions and Their Effect on NAV
Key Takeaways
A unit split does not change a fund's NAV or the value of a unit holder's investment; it only increases the number of units and lowers the price per unit.
Under the UTF Guidelines, a unit split may be carried out only once in any financial year of the fund.
A unit split is allowed only when the fund's monthly average NAV per unit has shown sustainable appreciation over the six months before the split.
In a variable-price fund, paying a distribution reduces NAV per unit by exactly the amount distributed.
In a fixed-price UTS, income is accounted for separately from NAV, so paying a distribution does not change NAV per unit.
Unit Splits
A unit split divides each unit into more units. UTMCs sometimes wrongly call it a "bonus" issue, but no extra value is created.
Study guide example: ABC Growth Fund declares a 1:2 split (one additional unit for every two held).
| Before the split | After the split | |
|---|---|---|
| Fund NAV | RM180,000,000 | RM180,000,000 |
| Units in circulation | 100,000,000 | 150,000,000 |
| NAV per unit | RM1.80 | RM1.20 |
| Investor's units | 1,000 | 1,500 |
| Value of holding | RM1,800 | RM1,800 |
The split affects neither the fund's NAV nor the value of any holding.
Why UTMCs split units
- Psychology – investors seem to prefer holding more low-priced units than fewer high-priced ones.
- Competitiveness – a lower price may attract new investors compared with competitors' high-priced units.
- Margins – at a lower price, the UTMC's margin on selling units looks smaller in cents per unit.
The rules
Because UTMCs once declared "bonus" units several times a year, which could mislead investors about true returns, the UTF Guidelines now say:
| Rule | Detail |
|---|---|
| Frequency | Once in any financial year of the fund |
| Pre-condition | The fund's monthly average NAV per unit has shown sustainable appreciation over the 6 months before the split, meaning it rose from one month to the next throughout the period |
| Trustee verification | The UTMC submits the Trustee's verification of compliance to the SC within 14 days after the split |
| Statement to unit holders | Must explain the split ratio, NAV per unit before and after, and the reasons |
SC guidance adds that the explanation should cover what a unit split is, why it is done and its effect on NAV per unit, units and values, and should state that the investment's value is the same whether made before or after the split and that the split does not affect future gains. The split is processed by closing the register, adjusting holdings and sending new statements.
Testing "sustainable appreciation"
SC guidance explains sustainable appreciation as the monthly average NAV per unit rising from each month to the next over the six months before the split. Two illustrative funds:
| Month | Fund P monthly average NAV | Fund Q monthly average NAV |
|---|---|---|
| January | RM1.10 | RM1.10 |
| February | RM1.12 | RM1.14 |
| March | RM1.15 | RM1.13 |
| April | RM1.16 | RM1.17 |
| May | RM1.20 | RM1.21 |
| June | RM1.22 | RM1.24 |
| Eligible to split in July? | Yes: every month higher than the last | No: March fell below February |
Fund Q ends higher overall, but the March dip breaks the month-to-month rise, so it must wait until it has six months of continuous appreciation (and has not already split in that financial year).
PRS funds too
The same arithmetic applies to PRS. The study guide's PRS example: a member holds one unit at RM2.10; after a 2-for-1 split she holds two units at RM1.05, still worth RM2.10.
Retaining income instead
If a fund retains income rather than distributing it, the NAV (and holdings' value) is maintained and unit holders receive no income to declare for tax. Since gains on selling units are generally not taxed, this can maximise after-tax returns.
Distributions and NAV
In most UTS (prices that move with NAV), paying a distribution reduces NAV by exactly the amount paid. It is not a bonus.
Study guide example: ABC Growth Fund declares 10 sen per unit; NAV RM180 million; 100 million units.
| Before | After | |
|---|---|---|
| Fund NAV | RM180,000,000 | RM170,000,000 |
| NAV per unit | RM1.80 | RM1.70 |
| Investor with 1,000 units | RM1,800 in units | RM1,700 in units + RM100 cash = RM1,800 |
Listed and fixed-price UTS
| Type | Effect of a distribution |
|---|---|
| Listed UTS | NAV should fall by the distribution and, in theory, so should the market price, but supply and demand may move the price more or less |
| Fixed-price UTS (RM1.00) | Net income is accounted for separately from NAV, so paying a distribution does not change NAV per unit |
Splits vs Distributions vs Reinvestment
| Event | Units held | NAV per unit | Total value to investor |
|---|---|---|---|
| Unit split | Increase | Falls proportionately | Unchanged |
| Cash distribution | Unchanged | Falls by the distribution | Unchanged (units plus cash) |
| Distribution reinvested in units | Increase | Falls by the distribution | Unchanged |
| Income retained | Unchanged | Keeps rising with income | Grows within NAV |
A fund declares a 1-for-4 unit split (one extra unit for every four held). An investor holds 2,000 units at RM2.50. What does the investor hold after the split?
8,000 units at RM0.625
2,500 units at RM2.50
2,500 units at RM2.00
2,000 units at RM2.00
How often may a UTMC carry out a unit split exercise under the UTF Guidelines?
Once in any financial year of the fund
Twice a year
Once every quarter
Only once in the life of the fund
In a fixed-price UTS with units priced at RM1.00, what happens to NAV per unit when a distribution is paid?
It is reset to the fund's original launch price
It falls by the full amount distributed
It rises because new units are created
It stays the same, as income is kept separate
Sections you finish are checked off in the contents.