Bonus Baits.

Bonus Baits in unit trust.

Bonus is usually related to the additional financial incentive being given by employers on top of their normal salary. That is one of the reasons everybody loves to receive bonus and the offer of a BONUS is very tempting and irresistable.

Thus when investors are approached by agents or financial institution personnel that certain funds have just announced “bonus”, the investors are often induced to invest immediately so that they too can benefit from the “bonus” announcement.

Truth be told, any so-called “bonus” are nothing but a UNIT SPLIT exercise conducted by the fund manager that will only result in more units of the fund being created but followed by a simultaneous lowering of the net asset value (NAV) per unit of the fund.

The Fund Management Company usually turns a deaf ear / close one eye on their agents’ use of the term “bonus” even though the correct terminology should be UNIT SPLIT. This is a marketing gimmick to boost sales. The FACT is a unit split does nothing except increase the number of units in the fund but in no way does it increase the value of the fund nor one’s investment. This is because the Net Asset Value price of the fund is adjusted down the very next day that the “bonus” is given.

Impact of Unit Split on the Fund Unit Price

“Whenever a distribution of unit split is made, a fund’s unit price and net asset value per unit will be reduced by the rate of unit split. Assuming there is NO market fluctuation, the buying before or after a unit split is made is indifferent to the investor as the unit price of the fund would have been revised downwards to account for the unit split."

Illustration:

Whilst a unit split DOES increase the number of units in an investor’s account, the total value remains the same because of the adjustment down of the net asset value per unit. There is NO advantage to an investor whether or not a split is carried out by the fund manager.

Many people have been told (usually by sales agents) that it is better to buy and get the "bonus" units But is this really true?

The answer is NO.

With the unit split of 5:100 or a “20% bonus”, you will have a “bonus” of 594.67 units (11,893.43 units x 5/100) making it a total of 12,488.10 units.

However if you “miss the boat” and purchase it after the “bonus”, your RM10,000 will buy you RM10,000 / RM0.8008 (ex-price) = 12,487.51 units.

The difference is half a unit because of the decimalization. So where’s the “BONUS” of 20%?

The “bonus” exercise is nothing more than a marketing gimmick to increase sales. The Company gets a huge increase in sales volume, whilst the agents earn easy commissions as the uninformed investor jumps onto the bandwagon to invest quickly before the “offer” expires believing they gain a 20% bonus.

The next time you are approached to BUY NOW because of BONUS, please remember that the Bonus is just BAIT to boost Sales. One apple split into 2 halves does not mean you have more than one apple!

We wish you successful investing.