CMFAS Collective Investment Schemes M3 — Questions and Answers
Question 1: What is a collective investment scheme (CIS)?
- A personal savings account
- A scheme where funds from multiple investors are pooled and professionally managed (Correct answer)
- A type of insurance
- A government subsidy programme
Correct answer: A scheme where funds from multiple investors are pooled and professionally managed
A CIS pools money from many investors and invests it collectively according to a stated investment objective, managed by professional fund managers.
Question 2: Who manages the investments in a unit trust?
- The unitholders themselves
- A professional fund manager (Correct answer)
- The stock exchange
- The government
Correct answer: A professional fund manager
A professional fund manager is appointed to manage the investments of a unit trust, making buy and sell decisions on behalf of unitholders.
Question 3: What is the role of a trustee in a unit trust?
- To manage investments
- To safeguard the assets of the fund and protect unitholders' interests (Correct answer)
- To sell units to investors
- To set the fund's investment strategy
Correct answer: To safeguard the assets of the fund and protect unitholders' interests
The trustee holds the assets of the unit trust on behalf of unitholders, ensures compliance with the trust deed, and acts as a check on the fund manager.
Question 4: What is the difference between an open-ended and a closed-ended fund?
- There is no difference
- Open-ended funds continuously issue and redeem units; closed-ended funds have a fixed number of units (Correct answer)
- Closed-ended funds have lower fees
- Open-ended funds are riskier
Correct answer: Open-ended funds continuously issue and redeem units; closed-ended funds have a fixed number of units
Open-ended funds create new units when investors buy in and cancel units when investors sell. Closed-ended funds have a fixed number of units traded on the exchange.
Question 5: What is the management fee in a unit trust?
- A one-time setup fee
- An ongoing fee charged by the fund manager for managing the fund (Correct answer)
- A penalty for early withdrawal
- A tax on investment returns
Correct answer: An ongoing fee charged by the fund manager for managing the fund
The management fee is an ongoing annual charge (typically 0.5% to 2% of NAV) paid to the fund manager for their investment management services.
Question 6: What does diversification mean in the context of CIS?
- Investing all money in one stock
- Spreading investments across different assets to reduce risk (Correct answer)
- Investing only in bonds
- Concentrating investments in one sector
Correct answer: Spreading investments across different assets to reduce risk
Diversification means spreading investments across different asset classes, sectors, and geographies to reduce the impact of any single investment's poor performance.
CMFAS Collective Investment Schemes M3
What is a collective investment scheme (CIS)?