CISI IoI Collective Investment Schemes 2 — Questions and Answers
Question 1: What is the 'net asset value' (NAV) per share/unit of a fund?
- The total value of all the fund's income received over the year
- The value of the fund's total assets minus its liabilities, divided by the number of shares or units in issue (Correct answer)
- The original amount invested by all investors in the fund
- The price at which the fund manager will buy units from investors
Correct 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.
Question 2: What is a 'tracker fund' (passive fund)?
- A fund that actively selects securities to outperform a benchmark
- 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 (Correct answer)
- A fund that tracks individual securities and adjusts holdings daily
- A fund that only invests in FTSE 100 companies with rising prices
Correct 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.
Question 3: What is a 'fund of funds'?
- A fund that invests directly in company shares and bonds simultaneously
- A fund that invests in other funds rather than directly in underlying securities (Correct answer)
- A fund that holds a fixed basket of the same 10 funds perpetually
- A fund that invests in funds run by its own management company only
Correct 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.
Question 4: What is the difference between an 'income unit' and an 'accumulation unit' in a unit trust?
- Income units are cheaper to buy than accumulation units
- Income units distribute investment income (dividends/interest) to investors as cash; accumulation units reinvest the income automatically within the fund (Correct answer)
- Accumulation units are only available to pension investors
- Income units are only available to UK residents; accumulation units are available globally
Correct 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.
Question 5: What is a 'KIID' (Key Investor Information Document) and who must provide it?
- A document provided by the FCA rating each fund from 1 to 5 stars
- 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 (Correct answer)
- A document provided by advisers detailing their charging structure
- A document listing all the individual securities held in a fund's portfolio
Correct 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.
Question 6: What is the 'dilution levy' on an OEIC or unit trust?
- A penalty charge applied to investors who trade too frequently
- 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 (Correct answer)
- A charge applied when the fund's NAV falls below a certain level
- A levy charged by the FCA to fund consumer protection schemes
Correct 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.
CISI IoI Collective Investment Schemes 2
What is the 'net asset value' (NAV) per share/unit of a fund?