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Collective investment schemes (advantages over direct investment (access…
Collective investment schemes
open ended
managers can create or cancel units in the fund as new money is invested or disinvested
unit trust
stated investment objective
trust, governed by trust law
limited ability to gear
operated by trustees and investment managers
trustees ensure UT is managed legally in accordance with the Trust Deed, hold the assets and oversee the calc of bid and offer prices and the admin of the UT
trustees and investment managers receive fees
investor buys "units" in the UT
unit price is based on NAV per unit
closed ended
once initial tranche of money has been invested the fund is closed to new money. After launch, the only way of investing in an investment trust company is to buy units from a willing seller
Investment trust company (ITC)
stated investment objective written into prospectus/ offer for sale document
public company, governed by company law
often quoted on stock exchange
can raise both debt and equity capital
operated by company directors and investment managers
directors and investment managers receive fees
investor buys "shares" in the ITC
share price is determined by supply and demand
share price often stands at a discount to the company's NAV per share
advantages over direct investment
access to larger/more unusual investments
discount to NAV
diversification
divisibility
economies of scale
expected return higher due to extra volatility associated with gearing and discount to NAV (ITC only)
expenses associated with direct investment avoided
expertise of investment managers
index-tracking of a quoted investment index is possible
marketability
quoted prices make valuation easier
suitable for small investors
tax advantages (possibly)
disadvantages over direct investment
loss of control
lack of diversification away from equities
additional layer of charges
need to hold some cash for liquidity which reduces expected exposure/return (UT only)
extra volatility due to gearing/ discount to NAV (ITC only)
tax disadvantages (possibly)