Misc. Investment Products Flashcards
What are the main features of a Help To Buy ISA?
A Cash ISA designed to help savers over 16 to get on the property ladder.
Only available to first time buyers.
Can be started with £1,200 in the first month & up to £200pm thereafter.
Government will contribute a bonus of £50 for each £200 invested. Min bonus is £400 meaning investor must contribute a min of £1600. Maximum bonus £3,000 pa.
Bonus is withdrawn if fund used for any other purpose.
Max property purchase of £450,000 in London & £250,000 outside of London.
What are the main features of the Lifetime ISA?
Introduced in April 2017 available to those aged between 18 & 40.
Maximum contribution is £4,000pa (which forms part of the £20,000 ISA allowance).
Lifetime ISAs can be cash or equity.
The government will apply a 25% bonus to any money invested.
The fund can be used to purchases first home or accessed in full as cash from age 60.
If not, a penalty applies equal to the amount of the bonus on the cash withdrawal, any interest plus a further 5%.
What are the main features of a Junior ISA?
A savings vehicle for parents & other relatives to save on behalf of a minor.
Both cash & equity versions available.
Up to £4,128 may be invested.
The child must be under 18 & live in the UK.
Can be opened by anyone with parental responsibility but the money belongs to the child & when they reach 16 they take over responsibility for managing the money until they can access at 18.
What are the main features of Child Trust Funds?
Introduced in 2002. Government opened them with £250. Reduced to £50 for children born after July 2010. Scrapped when Junior ISAs introduced.
After initial contribution, anyone can top-up a CTF up to same limit as Junior ISA.
No tax relief but tax-free environment.
Funds can be taken any time after the child’s 18th birthday with no tax liability.
What 3 broad groups do Derivatives fall into?
- Futures
- Options
- More esoteric contracts like contracts for differences & spread betting
What are the main features of a ‘Future’?
A legally binding agreement for one party to sell something to another party on a set future date for a set price.
The buyer has a ‘long position’ & seller ‘short position’. The buyer has the obligation to buy the asset & the seller has the obligation to sell it.
What are the main features of an ‘Option’?
An ‘option’ for the buyer to buy or sell at a set price on or before a certain date.
A call option = A right to buy (call on) the asset
A put option = A right to sell (put on to someone else) the asset
Both sides pay commission but the buyer only pays the premium on top of this. The seller has to pay margin payments.
Once bought, the buyer can choose:-
- Exercise the option- call on the right to buy or sell.
- Sell the option- on the market.
- Let it expire.
What is an ETF?
Index tracking funds listed on stock exchanges. Traded like a Share with prices updated throughout the day.
Standard Share costs apply but stamp duty won’t apply. ETFs can be held in ISAs.
A Standard ETF will hold the actual asset that it is set to track, so if a FTSE100 fund, it would actually buy the shares in the FTSE100.
How would an ETF using synthetic commodities work?
A benchmark or index is selected for the fund to replicate.
None of the assets that make up the index are actually purchased.
Instead, a range of derivatives are purchased.
For an ETC, this would mean using futures & regularly buying the performance of the tracked index.
For an ETF, this would involve the use of a ‘swap’ contract where you agree to pay the return on the index for a fee.
There is counter party risk as we the other party could default.
There is likely to be an element of tracking error as the assets are not actually held but rather replicated.
What is a hedge fund?
A specialist type of investment where a fund manager will use derivatives & buying undervalued stock with objective of absolute return. They have no correlation to the wider market & can achieve positive returns in falling markets. Hedge funds can gear-up.
Most operate from Cayman Islands or Bermuda & have high min. Investments of £1m. Very high charges too.
They may be accessed through ‘fund of funds’ giving the following advantages:-
Ability to diversify
Expert fund management
More liquid
Disadvantages:-
Fund of fund manager needs paying
It isn’t always transparent
Good performance hasn’t always been that good!
What do Absolute Return funds aim to do?
They rely on the skills of the managed to try to achieve a positive return in all market conditions within the funds risk profile.
