2.6 Investment Funds Flashcards
Do all major banks, insurance companies and some building societies and friendly societies offer investment fund products?
Yes
How do providers offer long term investments to clients?
They combine various assets into funds
Are funds fixed or flexible?
Some funds are packages.
Others are more flexible and allow investors to choose the types of assets that are included in them.
What do providers set certain limits on?
The amount of the investment.
The time period to maturity.
Sometimes the age of the investor.
Are funds more risky than savings?
Yes.
The value of a fund can fall as well as rise.
What are ‘collective investment firms’ also known as?
Fund management firms
What are collective investment firms?
Specialist organisations that carry out investment on behalf of their clients, who are individuals with money to invest.
Why are collective investment funds sometimes called ‘pooled investments’?
The money contributed by many people is put into a common pool and investments are made out of that money.
How might an individual investor contribute to a collective investment fund?
By paying in a lump sum.
By making regular payments into the fund.
What sorts of investments is the pool of money used to invest in?
What does this mean?
Shares Bonds Commodities Cash Property -> each investor's risk is spread across many different holdings.
What do collective investments include?
Unit trusts
Investment trusts
OEICS
Do some collective investment funds allow the individual investor to choose the types of company they want to put their money into?
Yes
Give the advantages of an individual investor using collective investments…
- Reduced risk bc fund invests in different types of company.
- Investor takes advantage of the expertise of the investment manager.
- The cost of hiring the services of a skilled fund manager is shared among all the investors.
- Fund managers deal with millions of pounds worth of investments and can negotiate reduced dealing costs for their investors.
- There is a wide choice of investment funds and collectives which cater for all types of investors, preferences and risk profiles.
What is the most common form of collective investment in the U.K.?
Unit trusts
Who do unit trusts appeal to?
Investors who want to buy shares but who are too small or inexperienced to be able to invest on their own
A unit trust is established under a trust deed, which is entered into by the promoters of the unit trust (the managers) and the trustees
That’s just a fun fact
What are the managers of a Unit trust responsible for?
Investing the funds. Valuing the assets. Fixing the prices of units. Offering the units for sale. Buying units back from unit holders.
What are the trustees of a Unit trust responsible for/what do they do?
Ensuring the managers comply with the terms of the trust deed.
They hold and control the trust’s asset on behalf of the unit holders.
They collect income from these assets and distribute the income to the unit holders.
Unit trusts are unitised funds, with each unit representing a proportion of the fund’s total asset value
Another fun fact.
Not that fun but still
Are unit trusts open ended?
What does this mean?
Yes.
Means that more units can be created when more money is invested
are unit trusts allowed to borrow money?
No
Are Investment trusts unitised funds?
No
Are Investment trusts actually trusts? What are they?
No.
They are public limited companies
What do Investment trusts issue?
They issue shares, which are purchased by investors and which are traded on the stock market.
Investment trusts.
What is the money they receive from the share issues used for?
Used to trade in the stocks and shares of other companies / other investments eg commodities.
Is the number of shares issued by Investment trusts limited?
Yes.
Limited by the investment trust’s constitution and cannot easily be increased -> ‘closed ended’
Are Investment trusts open ended?
No.
They are closed ended
Are Investment trusts allowed to borrow money?
Yes
What does OEIC stand for?
Open-ended investment company fund
What are OEICs a cross between?
Cross between Unit trusts and investment trusts
What structure do OEICs have?
Corporate structure
Do OEICs issue shares?
Yes
Can the number of shares vary?
Yes.
The number of shares can vary and can be created or liquidated according to the number of buyers and sellers in the market.
Who manages an OEIC?
What is their role?
An authorised corporate director.
Similar role to that of a manager of a Unit trust.
What is the authorised person known as the depositary responsible for?
Overseeing the operation of the company and for making sure that it complies with the requirements for investor protection.
(Equivalent to trustee of a Unit trust)
Do insurance companies offer various types of life cover?
Yes
What is term assurance?
An insurance plan that runs for a fixed period of time and pays out a lump sum if the insured person dies during the term.
This is not an investment policy.
What is an endowment policy?
A life insurance contract that pays a lump sum after a specified term or if the insured person dies before this date.
Are endowments a type of long term savings vehicle?
Yes
What are endowments often used for?
Used to provide a lump sum to pay off a mortgage or other long-term debt, but can be used to fund a specific event in the future.
What is an annuity?
A product that provides an income for people when they retire
How do people buy annuities?
A person takes a lump sum which they have already saved, usually via pension plan or some other investment vehicle, and uses it to buy an annuity.
What does an annuity provide?
Provides them with a guaranteed income for a fixed number of years or until the holder dies.
-> security of knowing what their annual income will be until they die.
