COLLECTIVE INVESTMENTS Flashcards
Name some collective investments
1) Unit Trusts
2) Investment Trusts
3) Investment bonds
4) OIECs
Advantages of Collective Investments
*Investment manager expertise
*Diversification - (of funds so less risk to loss, not all
eggs in one basket)
*Reduced dealing costs (as collectively millions of
pounds are invested dealing costs can be negotiated)
*Wide choice of funds
What are unit trusts?
A collective investment created under trust deed
How do unit trusts work?
Dep on where funds are held unit trusts are categorized as equity trust or fixed interest trust.
Trust divided into units, each unit rep a portion of trust’s total assets.
When more investors want to buy units, fund mgr makes available more units, so open-ended, UT can offer either
* accumulation units - reinvest income generated, suits capital growth
* distribution of income units - income recd split off
and distributed as profits
How are units priced?
Fund mgr calculates total value of assets and divides by the total no of units after allowing for an appropriate level of costs. Does this daily and sets the price of units
prices directly related to value of underlying securities that make up the fund
What is a trust?
In gen law, arrangement of one person gives assets to another (trustees) to be looked after, according to rules set out in the trust. In a unit trust, trust deed details the objectives of the trust. Here the investors hand money to trustees who in turn hand it over to the fund mgr to invest according to trust’s objectives.
Trustees to ensure these obj are met.
How are units bought and sold?
Unit trust managers are obliged to buy shares that investors wish to sell them back. So no secondary market or stock exch. Sometimes through intermediaries. Relatively simple process
What do purchasers receive on investing in unit trust?
- A contract note - saying which fund, what unit price, how many units and total invested, imp to keep for CGT
- Unit certificate - proves ownership of units - specifies fund and number of units
How are UT regulated and managed?
In UK UTs are regulated under the terms of FSMA 2000 and authorised by FCA - req that trust fund is suitably diversified and shd not borrow more than 10% of net asset value and even then only for a short time
What does a trust deed normally specify?
Rules and objectives of trust
Places obligations on both mgr and trustees to generate profits and protect investors.
Trust Manager’s responsibilities
1 - managing trust fund according to trust deed objectives
2 - valuing assets of fund
3 - fixing price of units
4 - offer units for sale and buying them back from unit holders
Trustees’ responsibilities?
1 - setting out trust’s investment directives
2 - holding and controlling trust’s funds
3 - advertisement and marketing
4 - ensure investor protection procedures in place
5 - issue certificates to investors
6 - maintain register of investors
Charges of UT
investment charge - to cover costs of purchasing
annual mgt charge - fee for use of professional investment mgr, typically 0.5% 1.5%
How are UT income taxed?
If equity trust - based on dividend tax for the year
If fixed interest trust - income treated as savings income
Risks of investing in Unit Trust
Trustees oversee the trust and ensure proper mgt
As collective/pooled investment, risk is lower than an individual investing on own as investment is spread across several kinds of shares eg between 30-150 shares.
*The actual risk dep on what type of trust is selected - cash trust less risk and specialist, or overseas investment carries higher risk
