CFM14090 - Understanding corporate finance: the legal and regulatory framework: collective investments

Collective Instruments

A collective investment vehicle is a form of investment fund that enables a number of investors to pool their assets and invest in a professionally managed portfolio of investments often gilts, bonds and quoted equities. Some funds may invest in unquoted investments or property. Investors in funds are able to spread or reduce the risk that is associated with investment as well as gain the benefits of professional management. The reduction in risk is achieved because the wide range of investments in a collective investment vehicle reduces the effect that any one investment can have on the overall performance of the portfolio.

Collective investment vehicles are regulated in the European Union through its directive on undertakings for collective investment in transferable securities (UCITS), which aims to protect investors and collective investment products to be sold throughout the EU once they have been authorised in one member state.

In the UK such products are authorised by the FSA. The rules applying to such schemes are set out in the Collective Investment Scheme sourcebook (COLL) in the FSA Handbook. Certain types of unregulated fund may only be promoted to professional investors.

Authorised investment funds

Open ended investment companies (OEICs) and authorised unit trusts are the best known types of collective investment schemes and are referred to as authorised investment funds (AIFs). See the Investment Funds Manual (IFM) for further details.

The IFM also addresses the UK tax rules for unauthorised unit trusts, offshore funds, investment trusts (see below) and real estate investment trusts.

Investment trusts

Investment trusts are limited companies with a fixed capital structure incorporated under company law.

Investment trusts invest in a broad range of shares and securities and use professional managers to oversee their investments. Investment trusts also enable investors to diversify their portfolios, spread risk and gain access to professional fund management.

Venture capital trusts

A venture capital trust (VCT) is a company, broadly similar to an investment trust, which has been approved by HMRC and which subscribes for shares in, or lends money to, small unquoted companies. Under the VCT scheme, VCTs and their investors enjoy certain tax reliefs.

The VCT scheme is designed to encourage investment in small unquoted companies. Individuals invest by holding shares in a VCT. The VCT invests in a spread of small unquoted companies, enabling investors to spread their risk, just as they do by holding shares in an ordinary investment trust company.

See the Venture Capital Schemes Manual (VCM50000) for more details.