DT claims and applications: Collective Investment Vehicles
What a Collective Investment Vehicle is
A collective investment vehicle raises capital by the sale of units or shares. Itinvests this capital to produce a return for its unitholders/shareholders. Typically thecollective investment vehicle will invest in a wide range of securities (usually shares orbonds) in one country or region, for example the United Kingdom, Europe, Japan, the FarEast.
A collective investment vehicle can be in the form of a fund, a trust (unittrust) or a company.
Collective Investment Vehicles - Funds
The participants buy units in the fund. Fund managers invest the capital raised fromthe sale of units by purchasing, for example, shares in companies, company loan stocks orgovernment bonds. A custodian, often a bank, holds the investments in its name. Theparticipants have a proportionate share of the whole fund. So if someone invests £1,000in the fund and the fund raises £100,000 that investor has a 1% share in the fund and,after deduction of management charges, will receive 1% of the income generated by theinvestments at fund level.
In the United Kingdom and some other countries collective investment vehicles arecommonly in the form of Unit Trusts. The fund is in the legal form of a trust,and the custodian (usually a bank) holding the investments is the trustee. The manager ofthe trust sell units to the public and the purchasers of these units become the unitholders. Each unit represents a share in each of the underlying securities and,after the deduction of the managers fees/expenses, income from the securities isdivided among the unit holders in proportion to the number of units they hold.
Collective Investment Vehicles Companies
Investors buy shares in the investment company. The company invests the capital raisedfrom the sale of its shares to buy shares, stocks or bonds. It uses the income it receivesfrom the investments to pay dividends to its shareholders.