Investment Funds Flashcards

What is the key structural difference between a unit trust and an Open-Ended Investment Company (OEIC)?

Answer: A unit trust is structured as a trust with a trustee, while an OEIC is structured as a company with a depositary

A unit trust is established under a trust deed with a trustee holding assets on behalf of unitholders, while an OEIC is a company structure with a depositary (rather than trustee) safeguarding assets. Both are open-ended, FCA-regulated collective investment schemes, but they differ in legal structure.

What does 'open-ended' mean in relation to an investment fund?

Answer: The fund can create and cancel units or shares in response to investor demand

An open-ended fund can continuously create new units/shares when investors want to buy, and cancel them when investors want to sell. The fund size fluctuates with demand. This contrasts with closed-ended funds (like investment trusts) which have a fixed number of shares.

An investment trust is trading at a share price of GBP 2.50 while its net asset value (NAV) per share is GBP 3.00. The investment trust is said to be trading at a:

Answer: Discount of approximately 16.7%

When an investment trust's share price (GBP 2.50) is below its NAV per share (GBP 3.00), it is trading at a discount. Discount = (NAV - Price) / NAV x 100 = (3.00 - 2.50) / 3.00 x 100 = 16.7%. Investment trusts frequently trade at discounts or premiums to NAV because they are closed-ended.

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

Answer: Income units distribute dividends to investors while accumulation units reinvest income back into the fund

Income units pay out any income (dividends, interest) generated by the fund directly to investors as cash. Accumulation units automatically reinvest all income back into the fund, increasing the value of each unit. The tax treatment is the same — income is taxable whether distributed or accumulated.

Which of the following best describes an Exchange-Traded Fund (ETF)?

Answer: An open-ended fund that tracks an index and is traded on a stock exchange like ordinary shares

An ETF is an open-ended investment fund that typically tracks an index (such as the FTSE 100) and trades on a stock exchange throughout the day like ordinary shares. This gives investors the diversification of a fund with the tradability and pricing transparency of listed shares.

What is the Ongoing Charges Figure (OCF) in relation to investment funds?

Answer: The annual running costs of the fund expressed as a percentage of the fund's assets

The OCF represents the total annual running costs of a fund, including the annual management charge (AMC), administration costs, and other operational expenses. It is expressed as a percentage of the fund's average assets and is deducted from the fund, reducing returns. It does not include transaction costs or performance fees.