Collective Investment Schemes Flashcards

What is a 'collective investment scheme' (CIS)?

Answer: A pooled investment vehicle where many investors' money is combined and managed collectively to invest in a diversified portfolio

A CIS pools money from multiple investors, which is then invested collectively by a fund manager in a diversified portfolio of assets. This gives smaller investors access to diversification and professional management that they could not achieve individually.

What is the difference between an OEIC and a unit trust?

Answer: Both are open-ended funds but OEICs are structured as companies and have a single price; unit trusts are structured as trusts and have a bid-offer price spread

Both are open-ended funds that expand or contract as investors buy or sell. The key differences: OEICs are structured as investment companies with a single pricing structure; unit trusts are structured as trusts with a bid-offer spread. OEICs have largely replaced unit trusts in the UK market.

What does 'open-ended' mean in the context of a fund?

Answer: The fund can create new units/shares and redeem existing ones in response to investor demand, meaning the size of the fund expands and contracts

An open-ended fund creates new units (or shares) when investors subscribe and cancels them when investors redeem. The fund size therefore changes with investor demand. This contrasts with closed-ended funds like investment trusts, which have a fixed number of shares.

What is a 'closed-ended' fund and how does it differ from an open-ended fund?

Answer: A closed-ended fund has a fixed number of shares listed on a stock exchange; investors buy and sell shares in the secondary market rather than subscribing to or redeeming from the fund manager

A closed-ended fund (such as an investment trust) has a fixed number of shares listed on a stock exchange. Investors buy and sell shares in the market rather than dealing directly with the fund. The fund size is fixed, so the share price can trade at a premium or discount to the net asset value (NAV).

What is the 'annual management charge' (AMC) in a fund?

Answer: The annual fee charged by the fund manager for managing the portfolio, expressed as a percentage of the fund's assets

The AMC is the recurring annual fee for managing the fund, deducted from the fund's assets. It is expressed as a percentage (e.g., 0.75% per year). Together with other expenses, it forms part of the Ongoing Charges Figure (OCF).

What is an 'Exchange Traded Fund' (ETF)?

Answer: A fund that tracks an index (or other benchmark) and is listed and traded on a stock exchange like ordinary shares

An ETF is typically a passive fund that tracks a market index (e.g., FTSE 100) and is listed on a stock exchange, meaning it can be bought and sold throughout the trading day at market prices, like ordinary shares. ETFs usually have lower charges than active funds.