Definition of a Unit

A unit is a standardized measure used in finance, investments, and accounting to represent shares, assets, or portions of a financial product. Units are commonly used in mutual funds, exchange-traded funds (ETFs), and limited partnerships to allocate ownership among investors.

For example, an investor purchasing 100 units of a mutual fund holds a proportionate share of the total fund’s assets.

Purpose of Units in Financial Transactions

Units are used in financial markets to:

• Represent ownership in pooled investment funds such as mutual funds and ETFs.
• Standardize investment allocation and pricing.
• Facilitate trading and valuation of financial products.
• Distribute returns and dividends based on unit holdings.
• Provide a clear measurement system for financial instruments.

Types of Units in Finance

Mutual Fund Units

• Represent an investor’s share in a mutual fund’s assets.
• Example: An investor buys 500 units in a balanced mutual fund, reflecting their proportion of ownership.

ETF Units

• Shares of an exchange-traded fund traded like stocks on an exchange.
• Example: An investor purchases 10 units of a Canadian equity ETF, tracking the TSX index.

Limited Partnership Units (LP Units)

• Used in partnerships where investors hold units instead of shares.
• Example: A real estate investment firm issues LP units to partners, distributing income based on unit ownership.

Unit of Account in Currency

• The standard monetary unit used to measure economic value.
• Example: The Canadian dollar (CAD) is the unit of account in Canada’s financial system.

Fund Unit Pricing

• Units are priced daily based on the fund's Net Asset Value (NAV).
• Example: If a fund’s NAV is $50 per unit, an investor buying 20 units invests $1,000.

How Units Are Priced and Traded

Net Asset Value (NAV) Calculation

• The price of a unit is determined by dividing the total fund assets by the number of units.
• Example: A mutual fund with $10 million in assets and 500,000 units has a NAV of $20 per unit.

Buying and Selling Units

• Units in mutual funds are bought and sold at the NAV price at the end of the trading day.
• ETFs trade throughout the day at market prices like stocks.

Dividends and Distributions

• Investors earn returns based on the number of units they own.
• Example: A fund paying $0.50 per unit in dividends gives an investor with 1,000 units a $500 payout.

Units vs. Shares

Feature	Units	Shares
Used In	Mutual funds, ETFs, limited partnerships	Public and private corporations
Trading	Bought and sold based on NAV or market price	Traded on stock exchanges
Ownership Type	Proportionate share in a pooled fund	Equity in a company
Dividends	Paid based on fund distributions	Paid by corporations to shareholders

Example: A mutual fund investor holds units, while a stock investor holds shares in a corporation.

Advantages and Disadvantages of Units

Advantages

• Provides easy access to diversified investments in mutual funds and ETFs.
• Allows fractional ownership in funds with varying investment amounts.
• Enables investors to earn passive income through distributions.

Disadvantages

• Some unit investments have management fees, reducing returns.
• Limited control over investment decisions in pooled funds.
• Unit prices fluctuate with market conditions and fund performance.

Related Terms

• Net Asset Value (NAV) – The per-unit value of a mutual fund or ETF.
• Exchange-Traded Fund (ETF) – A fund that trades on stock exchanges like individual stocks.
• Limited Partnership (LP Unit) – A form of investment ownership in private partnerships.

Interesting Fact

In Canada, mutual funds and ETF units are among the most common investment products, with over $2 trillion in assets held by Canadian investors.

Statistic

According to the Investment Funds Institute of Canada (IFIC), more than 50 percent of Canadian households own mutual fund units, making them a key part of retirement and long-term investment strategies.

Frequently Asked Questions (FAQ)

1. How is the price of a mutual fund unit determined?

The unit price is based on the Net Asset Value (NAV), calculated by dividing the total fund assets by the number of outstanding units.

2. Can units in a mutual fund be traded like stocks?

No. Mutual fund units are priced once daily and must be bought or sold through the fund provider, unlike ETFs, which trade throughout the day.

3. Do all units pay dividends?

Not all units provide dividends—some funds reinvest earnings, while others distribute payouts to unit holders.

4. What is the difference between an LP unit and a mutual fund unit?

An LP unit represents ownership in a limited partnership, while a mutual fund unit represents investment in a pooled portfolio of assets.

5. Can unit prices drop in value?

Yes, unit prices fluctuate based on market conditions, asset performance, and fund expenses.