Collective Investment Schemes Flashcards

What is the 'net asset value' (NAV) per share/unit of a fund?

Answer: The value of the fund's total assets minus its liabilities, divided by the number of shares or units in issue

NAV per unit is calculated by taking the total market value of all the fund's holdings, deducting any liabilities (such as management fees payable), and dividing by the total number of units in issue. It represents the theoretical value of each unit.

What is a 'tracker fund' (passive fund)?

Answer: A fund that aims to replicate the performance of a specified market index, such as the FTSE 100, by holding the same securities in the same proportions

A tracker (or index fund) passively replicates a market index by holding its constituent securities in proportion to their index weighting. The objective is to match (not beat) the index return, with lower costs than active management.

What is a 'fund of funds'?

Answer: A fund that invests in other funds rather than directly in underlying securities

A fund of funds invests in a portfolio of other collective investment schemes (funds) rather than directly in equities, bonds, or other assets. This provides additional diversification but typically involves a double layer of charges.

What is the difference between an 'income unit' and an 'accumulation unit' in a unit trust?

Answer: Income units distribute investment income (dividends/interest) to investors as cash; accumulation units reinvest the income automatically within the fund

Income units pay out dividends and interest generated by the fund's investments as a cash distribution. Accumulation units automatically reinvest that income into the fund, increasing the value of each unit over time without a cash payment to the investor.

What is a 'KIID' (Key Investor Information Document) and who must provide it?

Answer: A short, standardised document (maximum 2 pages) that fund managers must provide to investors before they invest, summarising key information about the fund's objectives, risks, costs, and past performance

The KIID (or KID for alternative funds) is a mandatory pre-sale disclosure document that fund managers must provide. It summarises objectives, risk/reward profile (on a scale of 1–7), ongoing charges, past performance, and practical information in plain language.

What is the 'dilution levy' on an OEIC or unit trust?

Answer: An adjustment to the fund's price to protect existing investors from the transaction costs incurred when large amounts of money flow in or out of the fund

When large inflows or outflows occur, the fund must trade its underlying holdings, incurring transaction costs that can dilute existing investors' returns. A dilution levy (or swing pricing) passes these costs to the investor who is joining or leaving, protecting those who remain.