This is the question that comes right after Why NAV Matters More Than Balance: fine, the number is honest - but what happens to me when someone new joins?
So let's settle it.
Imagine you own 10% of a fund.
A new investor arrives with twice as much money as you.
Should a stranger's deposit make you poorer?
Most people instinctively say yes. The correct answer is no - your value shouldn't move by a cent. Here's why.
Why everyone is afraid of dilution
The fear is reasonable, because most people learned ownership from companies.
A company can issue new shares. When it does, the pie is cut into more slices, and your slice gets smaller - sometimes without the company being worth a cent more. That's real dilution: more claims on the same value, so each claim is worth less. Every investor has felt it, so they carry the instinct into funds and brace for the same thing.
The fear isn't ignorance. The fear is experience.
But a fund is not a company. The mechanism is different in the one way that matters.
Why a fund is different
A company can print shares without adding equivalent assets. A properly run fund cannot.
When a million dollars walks in the door, the fund's assets go up by a million dollars. New units are not conjured out of thin air to dilute you - they are issued against the new cash that just arrived. Units and assets move together, in the same step, by the same proportion.
That single rule is the whole difference. New money brings its own new units. It does not reach into yours.
The numbers
Walk through it with real figures.
Before the new investor:
- Pool NAV: $1,000,000
- Units outstanding: 1,000,000
- NAV per unit: $1.00
- You hold 100,000 units - that's 10% of the fund.
A new investor deposits $500,000. At the current price of $1.00 per unit, the pool issues them exactly 500,000 units.
After the deposit:
- Pool NAV: $1,500,000
- Units outstanding: 1,500,000
- NAV per unit: $1.00 - unchanged
- You still hold 100,000 units - now 6.67% of the fund.
This is where most people stop reading and decide they've just been diluted.
They haven't.
Yes - your percentage of the fund went down, from 10% to 6.67%. And now the part that matters:
Your percentage dropped. Your value did not move at all.
Nothing was taken. Nothing was diluted. A bigger fund simply has more total units in it - and you own the same number, worth the same amount, as you did an hour earlier.
When dilution is real
This is the block worth reading twice, because dilution can happen - just not from an honest deposit. It shows up when the accounting is broken or dishonest:
- Units that can be minted by hand. If a manager can create units without matching capital arriving, your slice is quietly watered down at will. This is the one that should scare you most. (Ours cannot - issuance is mechanical, tied to the cash that arrived.)
- Units issued below NAV. If a new investor is handed units cheaper than they're worth, the discount is paid by everyone already in. That's a real transfer of value out of your pocket.
- Editable books. If the record can be adjusted after the fact, every number downstream is suspect, including yours.
Dilution isn't caused by more investors. It's caused by units appearing without value behind them. Honest unit accounting is precisely the thing that makes that impossible.
Why NAV beats "percentage owned"
Notice what the example quietly proved: "percent of the fund" is not the number you should care about.
An investor doesn't eat a percentage. The real question is never "do I own 10%?" - it's "what are my 100,000 units worth?" Those are different questions, and only the second one is your money. Percentage moves every time anyone joins or leaves. Your unit count, and the price of a unit, are what actually determine your wealth.
How it works here
The process is deliberately boring:
- Cash arrives.
- Units are issued at the current NAV.
- Assets and units increase together.
- NAV per unit doesn't move.
- Existing investors are untouched.
That's it. Boring is the point - the mechanism has no room in it to move value from one investor to another.
The one line to keep
If a new investor joining the fund changes the value of your units, something is wrong.
A deposit should make the pool larger.
It should never make your ownership cheaper.