CH 10 - 3 CISs vs direct investment

Question 1

1. Advantages

Answer 1

Specialist Expertise:
Access to professional management, especially valuable for small investors.
Diversification:
Easy way to spread investments across various assets, reducing risk.
Cost Efficiency:
Some costs associated with direct investment are avoided (e.g., research and transaction costs).
Divisibility:
Part of a holding can be sold, offering flexibility to investors.
Tax Advantages:
Certain schemes might provide tax benefits.
Marketability:
May offer better liquidity compared to some underlying assets (though this can vary).
Index Tracking:
Some funds (e.g., index tracker funds) aim to replicate the performance of specific market indices.

Question 2

Disadvantages

Answer 2

Loss of Control:
Investors cannot choose individual investments, relying on the fund manager’s decisions.
Management Charges:
Fees and charges for fund management can reduce returns.
Tax Disadvantages:
Issues like withholding tax on dividends may arise and are often non-reclaimable.

Question 3

Key Takeaways

Answer 3

• Collective investment vehicles are ideal for small investors due to diversification and professional management.
• They come with costs, limited control, and potential tax challenges, which might be a concern for some investors.