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CeMAP 1 (Unit one) > Topic 8 (collective Investements) > Flashcards

Topic 8 (collective Investements) Flashcards

1
Q

What are the main forms of collective investments?

A
  • unit trusts
  • investment trusts
  • investment bonds
  • OEICs
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2
Q

What is meant by diversification?

A
  • involves creating a portfolio of investments that are spread across different geographical areas, asset classes and sectors of the economy
  • the aim is to spread risk and make more money
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3
Q

How are investment funds categorised?

A
  • location
  • industry
  • investment
  • specialisation
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4
Q

What are managed funds?

A

Most companies offer managed funds and are chosen by people seeking steady market growth while remaining. Conservative with the risk of loss

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5
Q

Describe actively managed funds

A

Use the services of a fund manager to make decisions on asset selection and when holdings should be bought/sold

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6
Q

Describe passively managed/tracker funds

A

They want to replicate the performance of a particular stock market index. A manager can be used but asset selection is computerised

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7
Q

What is a unit trust?

A

A pooled investment creates under a trust deed

- an investor can contribute to a unit trust by way of a lump sum or regular contributions

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8
Q

How can a unit trust be categorised?

A
  • as an equity trust (underlying assets are mainly shares and pay a dividend)
  • fixed interest trust (interest yielding assets and pays interest)
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9
Q

What is a trust?

A

An arrangement whereby one person gives assets to another to be looked after in accordance with a set of rules

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10
Q

Who has control of the manager under a trust deed?

A

The trustees who get get the money from the investor

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11
Q

What is the role of the unit trust manager?

A

To buy back units from investors who wish to sell them

Will generate a profit from charging management fees and dealing in the units

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12
Q

What is the role of the trustees?

A

Have overall responsibility to ensure investor protection and carry out a number of duties

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13
Q

How are unit trusts authorised?

A

By the Financial Conduct Authority (FCA)

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14
Q

How are unit trusts priced?

A

The manager will divide the total value of the fund by the no. of units he has issued (unit prices are related to the underlying value of the fund)

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15
Q

What are the 3 important prices with unit trusts?

A
  1. Offer price (clients buy the units)
  2. Bid price (investors sell units back to the managers)
  3. Cancellation price (minimum permitted bid price)
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16
Q

What is meant by the bid/offer spread?

A

It is the difference between the bid and offer prices, usually in the region of 3-5%

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17
Q

What is forward pricing?

A

Where clients buy or sell in a given dealing period at the prices that will be determined at the end of the dealing period

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18
Q

What 2 documents do purchasers receive from managers?

A
  1. The contract note (confirmation of the fund, unit price and amount paid)
  2. The unit certificate (specifies the fund, no. of units held and proof of ownership)
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19
Q

What are the 2 charges for unit trusts?

A
  1. The initial charge (covers costs of purchasing fund assets)
  2. The annual management charge (the fee paid for the use of the professional investment manager between 0.5-1.5%)
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20
Q

What are the 2 types of units?

A
  1. Accumulation units (reinvest any income generated by underlying assets)
  2. Distribution or income units (split off any income received and distribute it to unit holders)
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21
Q

How are Unit Trusts taxed?

A
  1. Equity based trusts

2. Fixed interest trust

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22
Q

What are the rates for equity-based trusts?

A
  1. 5% basic rate
  2. 5% higher rate
  3. 1% additional rate

This happens when income is in excess of the DA

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23
Q

What is Fixed interest trust?

A
  • classed on savings income

- income is paid gross without deduction of tax

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24
Q

What are the risks with unit trusts?

A

-no guarantee the initial amount invested will be returned or a certain level of income will be paid

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25
Q

What are investments trusts?

A

They’re collective investments and are public limited companies whose business is investing in the stocks and shares of other companies

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26
Q

How can people invest in an investment trust?

A

Involves purchasing shares in the investment trust through:

  • a stockbroker
  • a financial advisor
  • direct from the investment trust manager
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27
Q

What is the annual management charge for investment trusts?

A

Between 0.5 and 1.5%

28
Q

What is Gearing?

A

Because investment trusts are constituted as companies they can borrow money to take advantage of investment opportunities

29
Q

Why are investment trusts seen as more risky?

A

Because of the ability to gear up

Some are ‘highly geared’ which means they have a higher level of borrowing relatives to the assets they hold

30
Q

How are investment trusts taxed?

A
  • at least 85% of the income received by investment trust managers must be distributed as dividends to shareholders
  • fund managers are exempt for CGT
  • investors are subject to CGT on the sale of their investment
31
Q

What is a split capital investment trust?

A

A type of investment trust that issues different classes of share

32
Q

What are the two common forms of share offered by split capital investment trusts?

A
  1. Income shares (receive all the income and there’s no capital growth)
  2. Capital shares (receive no income but receive all the capital growth remaining)
33
Q

What is a real estate investment trust?

A

Tax efficient property investment vehicles that allow private investors to invest in property whilst avoiding the disadvantages of direct property investment

34
Q

What is an OEIC?

A

An open ended investment company

Pools the funds of its investors to buy and sell the shares of other companies and deal in other investments

35
Q

What is meant by open-ended?

A

Where the investor buys shares in the company with no limit to the number of shares that can be issued

36
Q

How are OSICs regulated and managed?

A

Regulated and authorised by the FCA

Has an authorised corporate director who manages the investments, buys/sells shares and Insures the share price reflects the underlying net asset value of the investments

37
Q

What charges apply for OEICs?

A

There is an initial charge levied around 3 to 5% of investment value

There is an annual management charge of 0.5% indexed funds or 1.5% for actively managed funds

38
Q

How are OEICs taxed?

A

Same as unit trusts

  • fixed interest = paid without deduction of tax but subject to income tax on savings
  • equity-based = dividend is paid without deduction of tax
39
Q

What are the risks of investing in OEICs

A

There is no guarantee that the original capital will be returned all level of required income maintained

40
Q

What are endowments?

A

A type of investment based on life assurance

They vary according to the nature of underlying investment structure

Premium payments are maintained

41
Q

What endowments are comparatively low risk and why?

A

With-profit

Because they offer the guarantee of at least a minimum value at maturity

42
Q

What are friendly society plans?

A

Established as mutual self help organisations

Able to market a tax exempt savings plan because they pay no tax on investment returns

43
Q

What are investment bonds?

A

Collective investment vehicles based on unitised funds

Are set up as single premium, unit linked, whole of life assurance policies

44
Q

What are investment bonds attractive to investors?

A
  • Relative ease of investment and surrender
  • The simplicity of the documentation
  • The ease of switching from one friend to another
45
Q

How are investment bonds taxed?

A

Attract tax at 20% on Capital Gains
Basic rate= no further liability
Higher rate= income tax 40%
Additional rate= income tax 45%

46
Q

What is one benefit of a qualifying policy?

A

There is no tax liability on the proceeds of the plan on death or maturity

47
Q

What can a non-qualifying clan result in?

A

May result in tax liability for higher and additional rate taxpayers

48
Q

What must be payable annually half yearly quarterly or monthly for at least 10 years?

A

Premiums

49
Q

What happens when discontinuing payment of premiums?

A

If premiums cease within 10 years or 3/4 of the original term if this is less than 10 years, the policy becomes non-qualifying

50
Q

What is the sum payable on death?

A

Must be at least equal to 75% of the total premiums payable

51
Q

How do you maintain the balance of premiums?

A

Premiums in any one year must not exceed twice the premiums in any other year or 1/8 of the total premiums payable

52
Q

What is top slicing?

A

The way of determining what tax is due by calculating the average return over the term of the bond

53
Q

How is top sliced gain on the policy calculated?

A

Surrender value + withdrawals- original investment

Divided by no. Of complete years the investment has been in place

54
Q

What are the possible outcomes when top sliced gain is added to taxable income?

A
  • Income remains in basic rate
  • Exceeds basic rate and tax is due at 20% on the portion of top sliced gain falling into the higher rate band
  • Tax of 25% is charged on any top slice to gain falling in the additional rate
55
Q

What don’t investment bonds provide?

A

Don’t provide income in the form of dividends or distributions

56
Q

How much can investors withdraw from original investment each year without incurring an immediate tax liability?

A

5%

If not used it can be carried forward and accumulated up to an amount of 100% of the original investment

57
Q

What are non-mainstream pooled investments? (NMPI)

A
  • A unit in an unregulated collective investment scheme
  • A unit in a qualified investor scheme
  • A security issued by a special vehicle
  • A traded life policy
58
Q

NMPIs have an increased risk, who protects them?

A

Protection provided by the financial ombudsman and financial services

59
Q

What are structured products?

A

Investments that offer differing variations of risk and potential reward

They offer an element of protection of capital invested whilst investing in high performing high risk assets

60
Q

What is Structured capital at risk product (SCARPS)?

A

A product that provides an agreed level of income or growth over a specified period of time

61
Q

What happens with the capital invested with SCARPS?

A

The customer could lose some or all of the initial capital invested

62
Q

What is different in relation to capital with non-scarp structured investment product?

A

This product promises to provide a minimum of 100% of initial capital invested

63
Q

What are the risks associated with structured products?

A
  • counterparty risk
  • market risk
  • inflation risk
64
Q

What is a wrap account?

A

It’s set up by a provider to provide an interest-based platform to hold all investors investments

It’s enables the investor to monitor their holdings

65
Q

What are fund supermarkets?

A

They are designed to provide access to wide range of funds, not investment trusts

66
Q

What are wraps and fun supermarkets referred to as?

A

Platforms

CeMAP 1 (Unit one) (16 decks)

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