Topic 8 (collective Investements) Flashcards
What are the main forms of collective investments?
- unit trusts
- investment trusts
- investment bonds
- OEICs
What is meant by diversification?
- involves creating a portfolio of investments that are spread across different geographical areas, asset classes and sectors of the economy
- the aim is to spread risk and make more money
How are investment funds categorised?
- location
- industry
- investment
- specialisation
What are managed funds?
Most companies offer managed funds and are chosen by people seeking steady market growth while remaining. Conservative with the risk of loss
Describe actively managed funds
Use the services of a fund manager to make decisions on asset selection and when holdings should be bought/sold
Describe passively managed/tracker funds
They want to replicate the performance of a particular stock market index. A manager can be used but asset selection is computerised
What is a unit trust?
A pooled investment creates under a trust deed
- an investor can contribute to a unit trust by way of a lump sum or regular contributions
How can a unit trust be categorised?
- as an equity trust (underlying assets are mainly shares and pay a dividend)
- fixed interest trust (interest yielding assets and pays interest)
What is a trust?
An arrangement whereby one person gives assets to another to be looked after in accordance with a set of rules
Who has control of the manager under a trust deed?
The trustees who get get the money from the investor
What is the role of the unit trust manager?
To buy back units from investors who wish to sell them
Will generate a profit from charging management fees and dealing in the units
What is the role of the trustees?
Have overall responsibility to ensure investor protection and carry out a number of duties
How are unit trusts authorised?
By the Financial Conduct Authority (FCA)
How are unit trusts priced?
The manager will divide the total value of the fund by the no. of units he has issued (unit prices are related to the underlying value of the fund)
What are the 3 important prices with unit trusts?
- Offer price (clients buy the units)
- Bid price (investors sell units back to the managers)
- Cancellation price (minimum permitted bid price)
What is meant by the bid/offer spread?
It is the difference between the bid and offer prices, usually in the region of 3-5%
What is forward pricing?
Where clients buy or sell in a given dealing period at the prices that will be determined at the end of the dealing period
What 2 documents do purchasers receive from managers?
- The contract note (confirmation of the fund, unit price and amount paid)
- The unit certificate (specifies the fund, no. of units held and proof of ownership)
What are the 2 charges for unit trusts?
- The initial charge (covers costs of purchasing fund assets)
- The annual management charge (the fee paid for the use of the professional investment manager between 0.5-1.5%)
What are the 2 types of units?
- Accumulation units (reinvest any income generated by underlying assets)
- Distribution or income units (split off any income received and distribute it to unit holders)
How are Unit Trusts taxed?
- Equity based trusts
2. Fixed interest trust
What are the rates for equity-based trusts?
- 5% basic rate
- 5% higher rate
- 1% additional rate
This happens when income is in excess of the DA
What is Fixed interest trust?
- classed on savings income
- income is paid gross without deduction of tax
What are the risks with unit trusts?
-no guarantee the initial amount invested will be returned or a certain level of income will be paid
What are investments trusts?
They’re collective investments and are public limited companies whose business is investing in the stocks and shares of other companies
How can people invest in an investment trust?
Involves purchasing shares in the investment trust through:
- a stockbroker
- a financial advisor
- direct from the investment trust manager
What is the annual management charge for investment trusts?
Between 0.5 and 1.5%
What is Gearing?
Because investment trusts are constituted as companies they can borrow money to take advantage of investment opportunities
Why are investment trusts seen as more risky?
Because of the ability to gear up
Some are ‘highly geared’ which means they have a higher level of borrowing relatives to the assets they hold
How are investment trusts taxed?
- at least 85% of the income received by investment trust managers must be distributed as dividends to shareholders
- fund managers are exempt for CGT
- investors are subject to CGT on the sale of their investment
What is a split capital investment trust?
A type of investment trust that issues different classes of share
What are the two common forms of share offered by split capital investment trusts?
- Income shares (receive all the income and there’s no capital growth)
- Capital shares (receive no income but receive all the capital growth remaining)
What is a real estate investment trust?
Tax efficient property investment vehicles that allow private investors to invest in property whilst avoiding the disadvantages of direct property investment
What is an OEIC?
An open ended investment company
Pools the funds of its investors to buy and sell the shares of other companies and deal in other investments
What is meant by open-ended?
Where the investor buys shares in the company with no limit to the number of shares that can be issued
How are OSICs regulated and managed?
Regulated and authorised by the FCA
Has an authorised corporate director who manages the investments, buys/sells shares and Insures the share price reflects the underlying net asset value of the investments
What charges apply for OEICs?
There is an initial charge levied around 3 to 5% of investment value
There is an annual management charge of 0.5% indexed funds or 1.5% for actively managed funds
How are OEICs taxed?
Same as unit trusts
- fixed interest = paid without deduction of tax but subject to income tax on savings
- equity-based = dividend is paid without deduction of tax
What are the risks of investing in OEICs
There is no guarantee that the original capital will be returned all level of required income maintained
What are endowments?
A type of investment based on life assurance
They vary according to the nature of underlying investment structure
Premium payments are maintained
What endowments are comparatively low risk and why?
With-profit
Because they offer the guarantee of at least a minimum value at maturity
What are friendly society plans?
Established as mutual self help organisations
Able to market a tax exempt savings plan because they pay no tax on investment returns
What are investment bonds?
Collective investment vehicles based on unitised funds
Are set up as single premium, unit linked, whole of life assurance policies
What are investment bonds attractive to investors?
- Relative ease of investment and surrender
- The simplicity of the documentation
- The ease of switching from one friend to another
How are investment bonds taxed?
Attract tax at 20% on Capital Gains
Basic rate= no further liability
Higher rate= income tax 40%
Additional rate= income tax 45%
What is one benefit of a qualifying policy?
There is no tax liability on the proceeds of the plan on death or maturity
What can a non-qualifying clan result in?
May result in tax liability for higher and additional rate taxpayers
What must be payable annually half yearly quarterly or monthly for at least 10 years?
Premiums
What happens when discontinuing payment of premiums?
If premiums cease within 10 years or 3/4 of the original term if this is less than 10 years, the policy becomes non-qualifying
What is the sum payable on death?
Must be at least equal to 75% of the total premiums payable
How do you maintain the balance of premiums?
Premiums in any one year must not exceed twice the premiums in any other year or 1/8 of the total premiums payable
What is top slicing?
The way of determining what tax is due by calculating the average return over the term of the bond
How is top sliced gain on the policy calculated?
Surrender value + withdrawals- original investment
Divided by no. Of complete years the investment has been in place
What are the possible outcomes when top sliced gain is added to taxable income?
- Income remains in basic rate
- Exceeds basic rate and tax is due at 20% on the portion of top sliced gain falling into the higher rate band
- Tax of 25% is charged on any top slice to gain falling in the additional rate
What don’t investment bonds provide?
Don’t provide income in the form of dividends or distributions
How much can investors withdraw from original investment each year without incurring an immediate tax liability?
5%
If not used it can be carried forward and accumulated up to an amount of 100% of the original investment
What are non-mainstream pooled investments? (NMPI)
- A unit in an unregulated collective investment scheme
- A unit in a qualified investor scheme
- A security issued by a special vehicle
- A traded life policy
NMPIs have an increased risk, who protects them?
Protection provided by the financial ombudsman and financial services
What are structured products?
Investments that offer differing variations of risk and potential reward
They offer an element of protection of capital invested whilst investing in high performing high risk assets
What is Structured capital at risk product (SCARPS)?
A product that provides an agreed level of income or growth over a specified period of time
What happens with the capital invested with SCARPS?
The customer could lose some or all of the initial capital invested
What is different in relation to capital with non-scarp structured investment product?
This product promises to provide a minimum of 100% of initial capital invested
What are the risks associated with structured products?
- counterparty risk
- market risk
- inflation risk
What is a wrap account?
It’s set up by a provider to provide an interest-based platform to hold all investors investments
It’s enables the investor to monitor their holdings
What are fund supermarkets?
They are designed to provide access to wide range of funds, not investment trusts
What are wraps and fun supermarkets referred to as?
Platforms
