Collective Investments Flashcards
What are Collective Investments
Product offered as collective funds enable small investors to participate in large managed investments
- Take funds from savers/investors
- Group small funds together into some form of investment fund
- Invest this fund so as to generate returns over time which can be passed on to savers
- Institutions generate income by charging savers/investors for looking after their money
Advantages to investors
Provide retail investors with some access to capital markets as that enjoyed by wholesale investors
Trustee of the unit trust is the legal owner
Direct investments in the capital market is difficult for small investors
The types of Cost
Annual Management Charge (AMC) - This is the most frequently quoted cost and covers the fund management charge
Total Expenses Ratio (TER) - This shows the annual management charge plus any other costs that might be revealed in the annual report, such as audit fees, custody and administration
Reduction in Yield (RIY) - This is probably the most complete measure in that it shows the % in reduction in the return or yield taking account all costs over know investment period. This is the figure the provider must show on they key features document for certain products
Unit Trust
Fund managed by bank, insurance company or investment company
Investors buy units in the fund
A unit trust is constituted by a trust deed. The unit manager is responsible for the day to day operations of the fund and each unit of the fund has a trustee who takes custodian of the assets, maintains a register of unit holders and overseas the management of the trust fund
Net Asset Value (NAV) = Net Market Value of Assets / Liabilities
Open Ended Investment Companies (OEICs)
Similar to Unit trusts
An OEIC is a company who’s purpose is to invest in other companies
Individuals buy shares in funds operated by these OEIC, but these shares are similar to the units sold by unit trusts
Unit trusts and OEIC are bought back from the investment manager and are redeemed by being sold back to the investment manager
Investment Trusts
(You invest in a company that invests in companies)
An investment trust is a quoted company, usually listed on the stock market. These companies invest in shares of other quoted and unquoted companies in the UK and overseas
This company can borrow for gearing purposes (increase leverage)
Factors that affect investment trust share price:
The performance of the underlying asset
Market forces to (supply and demand) to which investment trust shares are subject may make the shares worth more or less than the underlying value of the NAV
Split-Capital Investment Trust
Investment trusts can have different types of shares.
Zero Dividend Preference - Target redemption value that will be paid to investors on a set date in the future. Not guaranteed. No dividends
Income Shares - Receive dividends after any interest or borrowing costs. No target level of redemption, as the rate will not depend on the investment performance
Capital Shares - The value depends on how much money is left after the zeros and income shares have been redeemed and any borrowings rapid
UCITS, REITS, ETFS
UCIT - Refers to a series of European directives
REITs - Gain exposure in the property market in a potentially more tax efficient way
ETF - Open ended funds which follow the performance of an index or objective closely
Taxation of Unit and Investment Trusts
It is the holder who is liable to tax, not the fund
When these investments are held outside a tax-favoured wrapper and the capital gains tax liability falls on the investor
Life Insurance Investments
Maximum Investment Plans (MIPs) - Regular monthly or annual premium investments - usually ran for 10 years. Once the term is complete the investor can either take the proceeds or leave the fund to continue to benefit from investment growth. It’s also possible at this stage to make tax efficient annual withdrawals
Insurance Company Investment Bonds - are similar to MIPs but there is a single premium or lump sum investment
Endowments combine investment with a substantial element of life assurance and have been widely sold in the mortgage market
Offshore Funds
Charges can be significantly higher than equivalent onshore ones
Often less reliably regulated than those in the UK
As a general rule for UK investors investing in securities unit and investment trusts are generally more likely to prove more cost effective and simpler than offshore funds
There are 2 types of offshore insurance bonds:
Distribution bonds, which pay a regular ‘income’
Non distribution bonds, which roll up gross
Types of Mutual Funds
Money Market Funds
Bond Funds
Balanced Funds
Equity Funds
Money Market Funds
Works like a retail savings account (but insured)
At a higher rate and check book, min £250
Considered essentially risk free
Ideal for emergency funds
Invests in:
T-Bills
Commercial Papers
Short Term municipal bonds (mainly tax free funds)
Bond Funds
Purpose to provide an income rather than a capital appreciation
Unlike owning a bond, bond funds:
Have no maturity
No repayment guarantees
Advantages over bonds:
Diversification if you have a small amount of money
You can reinvest coupons
Equity Funds
Income (dividends) or Growth (capital appreciation)
Income Funds are less risky
Tax is payable
Generally- ‘There is a fund available to suit anybodies needs’
Examples:
Blue Chip - Mainly for income
Growth - Companies profit with growth
Cyclical - Combats risk with business cycle
Value - invest in undervalued companies
Aggressive- Invest in smaller companies
SRI - social responsible companies
