CISI IoI Collective Investment Schemes — Questions and Answers
Question 1: What is a 'collective investment scheme' (CIS)?
- A savings account shared between multiple family members
- A pooled investment vehicle where many investors' money is combined and managed collectively to invest in a diversified portfolio (Correct answer)
- A government scheme for pooling pension contributions
- A scheme where investors collectively negotiate lower trading commissions
Correct 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.
Question 2: What is the difference between an OEIC and a unit trust?
- OEICs invest in equities; unit trusts invest in bonds only
- 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 (Correct answer)
- OEICs are regulated by the PRA; unit trusts are unregulated
- Unit trusts can be listed on a stock exchange; OEICs cannot
Correct 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.
Question 3: What does 'open-ended' mean in the context of a fund?
- The fund has no defined investment objective
- 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 (Correct answer)
- The fund has no maturity date for its bonds
- The fund manager has discretion to invest in any asset class
Correct 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.
Question 4: What is a 'closed-ended' fund and how does it differ from an open-ended fund?
- A closed-ended fund has stopped accepting new investors but otherwise operates identically to an open-ended fund
- 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 (Correct answer)
- A closed-ended fund invests exclusively in fixed-income securities
- A closed-ended fund charges a flat fee rather than a percentage-based annual management charge
Correct 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).
Question 5: What is the 'annual management charge' (AMC) in a fund?
- A one-off charge paid when first investing in a fund
- The annual fee charged by the fund manager for managing the portfolio, expressed as a percentage of the fund's assets (Correct answer)
- A charge paid when switching between funds within the same fund group
- A charge applied if the fund performs below its benchmark
Correct 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).
Question 6: What is an 'Exchange Traded Fund' (ETF)?
- An actively managed fund sold exclusively through financial advisers
- A fund that tracks an index (or other benchmark) and is listed and traded on a stock exchange like ordinary shares (Correct answer)
- A fund that only invests in foreign currency instruments
- A closed-ended property fund
Correct 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.
CISI IoI Collective Investment Schemes
What is a 'collective investment scheme' (CIS)?