The return to the investor for his or her investment in the unit trust comes from two elements namely, capital growth and income. Please note that certain kinds of assets, such as shares and property, are subject to changes in market value, leading to capital gains and capital losses.
However, other assets, such as cash investments, only earn income. Take as an example if you deposited K1,000 in a savings account, your capital (the K1,000) is fixed, and you earn interest. But if you buy a house and rent it out, you earn income (rentals), and at the very same time the value of the property may rise (capital gains).
When it comes to investing in unit trusts, capital growth refers to an increase in the price of units which occurs as the values of underlying investments rise. (Of course, these can also go down, which could lead to capital losses.)
The income generated from unit trusts comes from two main sources: dividends and interest. A dividend is an income paid by shares held in a given company, and interest is earned on the cash invested and held in the portfolio. (Although some fund managers aim to be fully invested, the daily creation and redemption of units within a unit trust means the fund must always have some cash on hand which by law is capped at 5% of total funds under management.)
Distributions: Investors in unit trusts can usually elect to either have the income paid to them on a periodic basis (quarterly or semi-annually), or to have income automatically reinvested. Not all unit trusts offer these choices. Property unit trusts, for example, usually do not offer automatic reinvestment, and some funds absorb income into the portfolio and do not offer distribution of income to unitholders.
When income is automatically reinvested, the management company applies the distribution due to a unitholder to the purchase of more units. Capital gain, in other words, means an increase in the unit price, while the reinvestment of distributions means more units in the investor’s account.