CISI Intro: Investment Funds

Topic snapshot

Sample questions

These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Investment Funds

Which statement correctly describes the legal structure of a UK unit trust?

• A. The manager legally owns the scheme property, and the trustee sells units to investors.
• B. The fund is a company that owns its own assets and is run by directors.
• C. Each unitholder directly owns a slice of every underlying asset, and no trustee is needed.
• D. An independent trustee holds the scheme property, and the manager runs the fund.

Best answer: D

What this tests: Investment Funds

Explanation: A unit trust is created under trust law rather than as a company. The scheme property is held by a trustee for the benefit of unitholders, while the manager is responsible for managing and operating the fund.

The core concept is the legal separation between the trust property and the management function in a unit trust. The trustee holds the scheme property on trust for the unitholders, giving investors a beneficial interest in the fund, while the manager is responsible for running the scheme, including investment management and administration in line with the trust deed and FCA rules.

This matters because investors do not rely on the manager also being the legal holder of the assets. The structure is designed so that:

• the trustee holds the assets
• the manager manages the fund
• unitholders hold units representing their interest in the trust

If the fund is described as a company owning its own assets, that points away from a unit trust and toward a corporate fund structure.

• A fund that is a company with its own assets describes a corporate structure, not a unit trust constituted under trust law.
• Giving legal ownership of the scheme property to the manager confuses management with custody; those roles are separated in a unit trust.
• Unitholders do not usually hold direct title to each underlying asset; they hold units representing a beneficial interest in the trust.

A unit trust separates ownership of the trust property from fund management, with the trustee holding assets for unitholders and the manager operating the scheme.

Question 2

Topic: Investment Funds

A trainee adviser tells a client that an OEIC uses separation of duties to help protect investors. The client asks who runs the fund and who independently checks that the scheme property is properly safeguarded. Which response is most accurate?

• A. The ACD manages the OEIC; the depositary safeguards assets and oversees the ACD.
• B. The depositary manages the OEIC; the ACD safeguards assets and oversees compliance.
• C. The ACD alone runs and controls the OEIC; a depositary is not part of the structure.
• D. The ACD and depositary are interchangeable administrators of the same functions.

Best answer: A

What this tests: Investment Funds

Explanation: The key principle is independent oversight within the OEIC structure. The authorised corporate director runs the fund, while the depositary is a separate party responsible for safekeeping scheme property and overseeing the ACD’s actions.

An OEIC is designed so that day-to-day operation and independent oversight are separated. The authorised corporate director, or ACD, is responsible for managing and operating the fund, including administration and dealing functions. The depositary is a separate entity whose role is to protect investors by holding or overseeing the safekeeping of scheme property and monitoring whether the ACD is acting in line with the fund rules and regulation.

That separation matters because the body running the fund is not the same body independently checking assets and control processes. The closest trap is the swapped-role answer, because it recognises both parties but assigns their responsibilities the wrong way round.

• Swapped roles: The depositary does not run the OEIC’s daily management; that is the ACD’s role.
• Duplicate-role idea: The two roles are deliberately separate, not interchangeable, because investor protection depends on independent oversight.
• Missing depositary: An OEIC does include a depositary, so saying the ACD alone controls the structure ignores a core safeguard.

In an OEIC, the ACD operates the fund while the independent depositary safekeeps scheme property and monitors the ACD.

Question 3

Topic: Investment Funds

Amira invests £3,000 into a UK OEIC through her online platform. She asks what normally happens after she places the order. Which statement is the single best answer?

• A. Units are set aside first, but ownership starts only after the next income distribution.
• B. The price is negotiated with a market maker and the trade settles through CREST.
• C. It trades immediately on the stock exchange and ownership is proved by a paper certificate.
• D. It is dealt at the next valuation point, paid via the platform, and confirmed by a contract note or statement.

Best answer: D

What this tests: Investment Funds

Explanation: A UK OEIC is normally bought using forward pricing, so the order is carried out at the next valuation point rather than at a live exchange price. Payment is arranged through the platform or fund operator, and the investor then receives confirmation of the holding, usually by contract note or account statement.

The core concept is that most UK collective investments such as OEICs are dealt directly through the fund manager or a platform, not by continuous trading on the stock exchange. After the investor places the order, it is usually executed at the next valuation point under forward pricing. The cash is then collected and settled through the platform or fund administration process, and the investor’s ownership is recorded, often in nominee form, with evidence provided by a contract note, transaction confirmation, or platform statement.

This basic process is different from listed securities, where price discovery, settlement, and ownership records follow exchange-trading conventions. The key takeaway is that for a typical OEIC purchase, the next fund valuation point and the post-trade confirmation matter more than exchange-style settlement.

• The exchange-trading and paper-certificate idea fits listed securities more closely than a typical OEIC purchase.
• Negotiating with a market maker and settling through CREST describes many exchange-traded instruments, not the normal dealing route for an open-ended fund.
• Linking ownership to the next income distribution confuses receiving income with becoming the holder of the units.

OEIC deals are usually forward-priced, with cash settled through the platform and the holding shown on a confirmation or account statement.

Question 4

Topic: Investment Funds

A UK retail investor only wants to buy an investment trust when the market price is less than the value of the underlying net assets per share. Trust A and Trust B both have a published NAV of 200p per share. Trust A trades at 190p and Trust B trades at 210p. Which choice best applies this principle?

• A. Choose Trust A, because it trades at a discount.
• B. Choose Trust B, because it trades at a discount.
• C. Avoid both trusts, because any gap to NAV shows a pricing error.
• D. Choose either trust, because investment trust prices should equal NAV.

Best answer: A

What this tests: Investment Funds

Explanation: The investor wants to pay less than NAV per share. Trust A meets that test because 190p is below the 200p NAV, so it trades at a discount. Trust B trades above NAV, so it is at a premium.

For an investment trust, the share price is set by market supply and demand, while NAV reflects the value of the underlying assets per share. Because investment trusts are closed-ended, the market price can differ from NAV.

A price below NAV means the trust is trading at a discount. A price above NAV means it is trading at a premium. Here, Trust A at 190p versus a 200p NAV is at a discount, so the investor is paying less than the underlying net asset value per share. Trust B at 210p versus a 200p NAV is at a premium, so it does not meet the stated rule.

The key point is that a discount or premium is a normal feature of investment trust pricing, not automatically a mistake.

• Choosing the trust at 210p reverses the concept: a price above a 200p NAV is a premium, not a discount.
• Saying either trust is suitable ignores that investment trust shares can trade away from NAV because they are bought and sold in the market.
• Treating any gap to NAV as an error confuses normal investment trust pricing with a mispricing that must be corrected.

Trust A trades below its 200p NAV, so it is at a discount and matches the investor’s rule.

Question 5

Topic: Investment Funds

Which statement correctly compares active management with passive (index) management in a collective investment fund?

• A. Active management aims to outperform a benchmark; passive management aims to track it, with returns mainly reflecting the index.
• B. Active management does not use benchmarks; passive management relies on stock selection to generate extra return.
• C. Active and passive management both mainly seek to minimise tracking error to the same index.
• D. Active management aims to track a benchmark; passive management aims to outperform it through manager skill.

Best answer: A

What this tests: Investment Funds

Explanation: Active management seeks to beat a benchmark, so its expected extra return comes from the manager’s decisions, such as security selection or asset allocation. Passive management uses the benchmark as the target and aims to deliver the market return of that index, usually with low tracking error.

The key difference is the manager’s objective. An active fund is managed to outperform a benchmark, so the expected source of any extra return is manager skill, often called alpha. A passive or index fund is managed to replicate the performance of a chosen index as closely as possible, so its return is expected to come mainly from the market or index itself rather than from stock-picking skill.

A benchmark can be relevant to both approaches, but it is used differently:

• In active management, it is a yardstick for comparison.
• In passive management, it is the portfolio target.
• Tracking error is especially important for passive funds.

The closest confusion is thinking active funds ignore benchmarks altogether; in practice, they often use them to measure success.

• Reversed objectives: Saying active tracks while passive outperforms swaps the core definitions.
• Benchmark confusion: Active funds may differ from a benchmark, but they do not necessarily ignore it; it is often the performance reference point.
• Tracking error trap: Minimising tracking error is mainly associated with passive management, not both styles equally.

Active managers try to add value over a benchmark, whereas passive managers mainly aim to mirror an index and earn the market return.

Question 6

Topic: Investment Funds

A UK retail investor places buy orders at 2:00 pm for units in a unit trust and shares in an OEIC. Both funds have a daily valuation point at noon and state that they deal on a forward-pricing basis. Which statement best applies the dealing principle?

• A. Both orders should normally use the next valuation price struck after the orders are received.
• B. The investor may choose either the noon price or the next valuation price for both orders.
• C. Both orders should use the noon price already published that day.
• D. The OEIC should use the next valuation price, but the unit trust should use the noon price.

Best answer: A

What this tests: Investment Funds

Explanation: Forward pricing means an order in a collective fund is normally executed at the next valuation point after the instruction is received. That principle applies to both unit trusts and OEICs, even though they may quote prices differently.

The core principle is forward pricing. An investor does not usually deal at the last fund price already known; instead, the manager uses the next valuation after the order is received. This helps prevent investors from exploiting stale prices and supports fair treatment between incoming, outgoing, and existing investors. The principle applies to both unit trusts and OEICs. A unit trust may often show separate buying and selling prices, while an OEIC usually has a single price, but that pricing format is different from the rule about whether dealing is forward or historic. The key takeaway is that quoted price structure and dealing basis are not the same thing.

• Using the noon price confuses forward pricing with historic pricing; a price already published is not normally locked in for a later order.
• Giving the OEIC the next price but the unit trust the noon price wrongly treats pricing format as a dealing rule; both can deal on a forward basis.
• Letting the investor choose between prices would be unfair to other investors and is not how fund dealing works.

Forward pricing means both funds normally deal at the next price calculated after the instruction is received, not a price already published.

Question 7

Topic: Investment Funds

Which feature is commonly an advantage of a collective investment such as an OEIC or unit trust?

• A. Access to a diversified portfolio from one investment
• B. Direct control over each underlying security selected
• C. Freedom from annual management and administration charges
• D. Guaranteed cash access in all market conditions

Best answer: A

What this tests: Investment Funds

Explanation: A collective investment pools money from many investors, which can provide diversification that might be difficult to achieve individually. This is a key advantage of products such as OEICs and unit trusts, although charges still apply and liquidity is not guaranteed in every market condition.

A core advantage of collective investments is diversification. By pooling investors’ money, an OEIC or unit trust can spread holdings across many securities or asset types, so one investment gives broader exposure than buying a single share or bond directly. Collective funds are also professionally managed, which can help investors who do not want to select and monitor investments themselves. However, these benefits do not remove costs or risk: management and administration charges reduce net returns, and liquidity can be affected if underlying assets are difficult to sell.

So the correct feature is broader diversification through one investment, not direct control, zero charges, or guaranteed liquidity.

• Control: In a collective fund, the manager chooses and monitors the underlying holdings; the investor does not select each security directly.
• Cost: Pooling money does not remove charges. Collective investments normally have ongoing management and administration costs.
• Liquidity: Many funds offer regular dealing, but cash access is not guaranteed in all market conditions and dealing may be restricted in exceptional cases.

Pooling investors’ money lets the fund hold a range of assets, giving diversification through a single investment.

Question 8

Topic: Investment Funds

A UK retail investor is considering a unit trust and asks how investor protection works in practice. She wants day-to-day investment decisions to be separate from independent safekeeping of scheme property and oversight of the fund mandate. Which arrangement best applies this principle?

• A. Trustee sets investment strategy; manager only administers subscriptions.
• B. Manager runs the portfolio and holds assets; trustee markets the fund.
• C. Trustee runs the portfolio; manager holds assets and monitors compliance.
• D. Manager runs the portfolio; trustee holds assets and oversees compliance.

Best answer: D

What this tests: Investment Funds

Explanation: In a unit trust, the manager is responsible for day-to-day portfolio management. The trustee provides an independent layer of investor protection by safeguarding the scheme property and overseeing whether the manager is acting within the trust deed and regulations.

The key principle is separation of duties. In a UK unit trust, the manager makes the investment decisions and operates the fund on a day-to-day basis. The trustee is independent of the manager and is responsible for the safekeeping of the scheme property, while also overseeing whether the manager is running the trust in line with the trust deed and applicable rules.

This split helps protect investors because the same party is not both managing the money and independently controlling the assets. If the roles are swapped, or if the manager also keeps custody of the assets, that weakens the oversight structure built into a unit trust. The closest distractors confuse oversight with portfolio management, but those are not the trustee’s main investment role.

• Role reversal: Putting the trustee in charge of stock selection swaps the two core functions.
• No independent safekeeping: Letting the manager both invest and hold the assets removes the separation designed to protect unitholders.
• Too narrow for the manager: Reducing the manager to administration ignores its main responsibility for managing the portfolio.

This reflects the core unit trust split between portfolio management by the manager and independent safekeeping and oversight by the trustee.

Question 9

Topic: Investment Funds

Which statement best describes private equity?

• A. Investors commit capital to a typically closed-ended fund, with gains usually realised by sale or IPO of portfolio companies.
• B. Investors subscribe to a daily-dealt fund, with gains realised when units are redeemed at net asset value.
• C. Investors lend to governments, with gains realised mainly through fixed coupon payments.
• D. Investors trade listed shares on an exchange, with gains realised mainly from short-term market movements.

Best answer: A

What this tests: Investment Funds

Explanation: Private equity normally raises money through committed capital rather than daily subscriptions. It invests in unlisted companies and aims to realise gains when those businesses are sold or floated on a stock exchange.

Private equity is an alternative investment in which investors commit capital to a fund, often for a fixed life. The manager draws down that capital over time to buy stakes in unlisted companies, improve or grow them, and then exit the investment. Common exit routes include a trade sale, a sale to another financial investor, or an initial public offering. That is why the key features are committed capital-raising and gain realisation through disposal of portfolio companies, not daily dealing or coupon income. The closest confusion is with open-ended retail funds, but those allow subscriptions and redemptions at NAV rather than planned exits from private businesses.

• Daily dealing: Subscribing and redeeming at net asset value describes an open-ended fund such as an OEIC, not private equity.
• Coupon income: Lending to governments for fixed interest payments describes bonds or gilts, not ownership of private companies.
• Listed markets: Trading quoted shares on an exchange refers to public equity, whereas private equity focuses on unlisted businesses and exit events.

Private equity usually raises money through investor commitments and seeks an exit by selling or listing the underlying unlisted businesses.

Question 10

Topic: Investment Funds

An investment trust has a net asset value of 250p per share, but its shares are trading at 235p on the London Stock Exchange. Which statement best explains this feature?

• A. It issues and cancels units each day to keep the market price equal to net asset value.
• B. It is a closed-ended fund, so its shares trade between investors and can move to a discount or premium to net asset value.
• C. Investors can always redeem directly with the fund at net asset value whenever they want to sell.
• D. It is priced only once daily by the manager, so exchange trading does not affect the share price.

Best answer: B

What this tests: Investment Funds

Explanation: An investment trust is a closed-ended fund with shares quoted on a stock exchange. Because investors buy and sell those shares in the market, the share price is set by supply and demand and may sit below NAV at a discount or above NAV at a premium.

The key concept is that an investment trust is a closed-ended company. It has a fixed pool of capital, and its shares are bought and sold between investors on a stock exchange rather than routinely created or cancelled by the fund manager. That means the market price is influenced by investor demand as well as the value of the underlying portfolio.

If the shares trade below the net asset value per share, they are at a discount; if they trade above it, they are at a premium. In the stem, a NAV of 250p and a market price of 235p means the trust is trading at a discount. This differs from open-ended funds, where dealing is generally based more directly on NAV.

• The create-and-cancel mechanism is associated with open-ended structures, not the usual closed-ended structure of an investment trust.
• Manager-set daily pricing describes how many open-ended funds are dealt, but it does not explain exchange-traded shares moving independently of NAV.
• Direct redemption at NAV is not the normal way investors exit an investment trust; they usually sell their shares on the stock exchange.

Investment trust shares are traded on the stock exchange, so market supply and demand can push the price below or above NAV.

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Related focused pages

• Free CISI Intro Full-Length Practice Exam
• CISI Intro: Introduction
• CISI Intro: Economic Environment
• CISI Intro: Financial Assets and Markets
• CISI Intro: Equities
• CISI Intro: Bonds
• CISI Intro: Derivatives
• CISI Intro: Financial Services Regulation
• CISI Intro: Taxation, Investment Wrappers and Trusts
• CISI Intro: Other Financial Products
• CISI Intro: Financial Advice

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