Collective Investment Schemes, Funds and Managed Investments
What a candidate must understand
Collective schemes pool investor money under professional management. Distinguish open-ended funds (units created and redeemed at NAV) from closed-ended funds (fixed capital, traded on exchange, may trade at a premium or discount to NAV). Know unit trusts, OEICs/SICAVs, ETFs, money market funds, hedge funds and private equity funds. Understand NAV calculation: (assets − liabilities) / units outstanding, typically struck at a valuation point using bid or last prices. Cover charging structures: initial/entry charge, annual management charge, performance fees, and the effect of dilution levies or swing pricing. Know the roles of the manager, trustee/depositor, custodian and auditor, and the protections from segregation and independent oversight. Understand accumulating vs distributing units and the tax implications. Recognise index tracking vs active management and tracking error.
Traps that appear in questions
- Assuming closed-ended funds always trade at NAV; they can trade at discounts.
- Forgetting that a fund's NAV is struck at a specific valuation point, not continuously.
- Confusing the trustee (oversees the manager, safeguards unitholders) with the custodian (safekeeps assets).
- Overlooking that performance fees align manager incentives but can encourage risk-taking.
- Mixing accumulating units (income reinvested) with distributing units (income paid out).
Worked example / rule of thumb
A fund has assets of 105m, liabilities of 5m and 10m units. NAV = (105 − 5) / 10 = 10.00 per unit. Rule of thumb: open-ended = NAV-driven creation/redemption; closed-ended = supply fixed, price set by the market.