Topic 8 Flashcards
Explain professional management as a advantage of collective investments
Professional management is an advantage for investors who invest collectively as it allows the cost of these services to be spread across the investors involved making the high quality advice and management affordable and profitable.
As well as this the professional management allows the investor access expertise which is years and years of collective knowledge and experience which they would not possess and allowing all the management including the research, the updates of the investments to be monitored closely by the professionals making the investment little to no work.
Explain Diversification as a advantage of collective investments
Diversifying the risk involved is an advantage which can be seen when investing in collective investments as if one industry/company performs poorly then the loss is diluted between the investors as well as this the funds may not be available to access investments which are profitable at the time and not have the capital to diversify their investments so pooling the money together dilutes the risk and increases the chances of success.
Explain Cost efficiency in dealing as a advantage of collective investments
By pooling together money these managers deal with millions of pounds from investors which allows them have a lot of purchasing power enabling them to negotiate their transaction fees within dealing and effectivly passing on this saving ot the investors, as they do have this purchasing power they can also easily bypass minimum buy ins which would be difficult for those individual investors to by corporate bonds and others.
Finally the managers will need to rebuild and rebalance their portfolios which can be expensive for a individual investor due to lack of knowledge and money therefore it can be done effectively through pooling investors together.
Explain Broad choice of funds as a advantage of collective investments
This collection of investors allows the managers to invest in a wide range of investments which can appeal to anyones investment plans wether it is to see a steady growth of income or to invest into capital growth depending on the type of investors e.g. high/ low risk, there is something for everyones needs.
With this broad investment portfolio those investors who have moral or ethical issues can choose their investments as well as their geographical location or market which is a made to measure for the investors.
Explain Access to otherwise inaccessible assets as a advantage of collective investments
This access can be opened up by funds due to high entry costs in areas such as commercial bonds and properties which allow those individual investors to access the investment which they want but would otherwise not be able to afford, as well as this the access allows them to look into private niche areas such as infrastructure equities which the investor would have not been able to access otherwise. Finally this investment into the fund can indirectly give access to investments such as commercial real estate or other investments which had no idea.
How are units bought
Units can be bought from either unit trust managers or through intermediaries such as financial advisors or investment platforms, this can be either through written application, telephone or online. All of the calls are recorded in case of dispute.
Units are usually priced at the end of the deals which will not give the exact amount to the investors until the end of the deal but the transaction will be processed by the unit trust manager.
The documentation which is issued to the purchaser if bought through the unit trust manager will state the fund which they have bought, the number of units, the price of each unit and then the total amount of the transaction.
If they are bough online or through intermediaries then they may not receive this document but they may receive monthly updated of the units and the value of the unit.
How are units sold
Selling units will also have to go through the unit trust manager which will have to buy back the units unlike shares which a secondary market will have to be used, the unit manager will have to buy back those units at the pricing at the time.
The document which was issued at the time of purchase will come with a form of renunciation which the investor will have to fill out in order to incite the selling of the units. If the investor will only want to sell a few of their units a new document will be issued for those units. The units bought through an intermediary will have to be issued a renunciation form for them units.
The pricing is usually the same as when bought in the same way of forward pricing meaning the price will not be determined until the end of the transaction. If it is a single pricing unit then the mid point pricing will be appointed to avoid confusion of all the in and outflows of the fund.
What are the advantages of this system for units
The advantages include the elimination of a secondary market which will remove the volatility of supply and demand fluctuations as the fund manager is involved in all the transactions which will make it smoother for all the parties involved.
There is also flexibility for investors as investors can buy in increments making the investment suitable for everyones goals financially.
Finally the ease of documentation allows transparency for all the parties involved and for tax purposes.
As a risk of investing in unit trusts what is fraud risk and governance
There is oversight of trusts by trustees which adhere to a legal framework in order to regulate and reduce fraudulent activities in the unit market.
These trustees hold the units on behalf of the investors as they act as custodians as well as regulating the fund managers making sure there is transparency and no false advertisement or fraud in the market.
These funds and the managers are regulated by the financial conduct authorities (FCA) which will have regulations such as 10% of the value of the net value asset is not borrowed and it must also be short term.
As a risk of investing in unit trusts what is reduced risk through diversification
Risk can be reduced through diversification as the investment can be spread over 30-150 or more investments in different industries in different locations which will dilute and nullify a few poor performances.
However the trusts are not protected against systematic risk such as an economic downturn.
As a risk of investing in unit trusts what is risk varied based on type of unit trust
Cash and fixed income based unit trusts are suited to low and risk adverse investors who are looking for steady income however these investments can be affected by inflation meaning the initial investment could erode.
Equity based funds are for those who are high risk and long term persistent investors as this is the investment into share prices which can be volatile and affected by the market but can have high return.
Specialist funds this for those investing in niche areas and markets such as a technological investment this can have its risk due to the instability of the market and if the market suffers then the investment is at risk as well as it being hard to sell in a market downturn.
Overseas and international funds are at risk of currency devaluation as if the pound strengthens vs a funds currency then the investment can be at risk and will not hold value.
As a risk of investing in unit trusts what is no guaranteed return
With unit trusts there is no guaranteed returns like in other investments like deposit accounts therefore there is a capital risk meaning that the investment made is susceptible to market downturns as well as income risk meaning dividends are not guaranteed to the investor and could not see a steady income if performance is poor.
As a risk of investing in unit trusts what is Manager risk
There is a heavy dependance on the expertise of the manager of the funds and their decisions in their investments with your money therefore if they fail to build a portfolio which is good or invest into failing markets the the investment could be lost therefore individuals should see the performance history of the managers and the firm.
As a risk of investing in unit trusts what is Market and Economic risk
The risk of a failing market or economy is not immune to the funds therefore if there is anything which occurs in the economy such as a recession then the investment can be heavily affected as well as new regulations in markets hurting investments.
As a risk of investing in unit trusts what is liquidity risk
certain market conditions such as a turmoil can affect access to the funds compared to other investments therefore in times of crisis the availability of the funds in a time frame can be affected quite heavily.
As a risk of investing in unit trusts what is inflation risk
This risk is that even if the fund returns a profit, when compared to the inflation rate over the period of time of the investment it could end in breaking even or a loss. this is especially evident in cash and fixed income funds.
