How a fund works

Pooling, units and the price

Suppose a thousand people put EUR 10,000 each into a fund. The fund has EUR 10 million and buys, say, 300 shares in different companies. Each investor receives units: if the fund issued one unit per euro, each holds 10,000 units out of 10 million. The portfolio is valued at the end of every dealing day; its total value, minus what the fund owes (fees accrued, taxes), divided by the number of units, is the net asset value per unit (NAV). If the shares rise 2%, the NAV rises from EUR 1.00 to roughly EUR 1.02, and your 10,000 units are worth EUR 10,200.

Three things follow. You never own the shares directly; you own units in a vehicle that owns them. The price you deal at is the NAV, not a price set by supply and demand for the units themselves. And every investor is treated alike: the same price, the same costs, the same proportion of every holding.

Open-ended or closed-ended

An open-ended fund creates new units when money comes in and cancels units when investors redeem; its size changes every day, and you buy from and sell to the fund itself at the NAV. Most funds sold to private investors in Europe are open-ended. A closed-ended fund issues a fixed number of shares once; afterwards you buy and sell them from other investors on an exchange, at a market price that can be above or below the NAV (a premium or a discount). Investment trusts in the United Kingdom and most private equity funds are closed-ended.

UCITS, AIF, ELTIF, ETF

The labels tell you which rules the fund follows. A UCITS (Undertakings for Collective Investment in Transferable Securities, Directive 2009/65/EC) is the EU standard for funds sold to the public: diversification is prescribed (no more than 10% of assets in one issuer, holdings above 5% capped at 40% in total), borrowing is restricted, the assets must be held by an independent depositary, and investors can redeem at least twice a month, in practice daily. An AIF is any other fund; its manager is regulated under the AIFMD (Directive 2011/61/EU), but the fund's own rules on what it holds and how often it deals are set in its prospectus. An ELTIF is an AIF built for long-term, illiquid investments that may be sold to private investors under conditions. An ETF is a fund, almost always a UCITS in Europe, whose units are also traded on an exchange throughout the day, with a market maker keeping the price close to the NAV.

Who does what

The management company (or AIFM) decides what the fund buys and sells and is paid the management fee. The depositary, a bank independent of the manager, holds the fund's assets, checks that the manager follows the rules and that the NAV is calculated properly; because the assets sit with the depositary, the manager's insolvency does not take them with it. The administrator calculates the NAV and keeps the register of unit-holders. The auditor checks the annual report. The distributor (your bank, broker or platform) sells you the units and is often paid part of the management fee for doing so, which is one reason costs matter: see day 3.

What you actually own

Units in a fund are a claim on a proportion of a portfolio, valued at a price the fund calculates, redeemable on the fund's terms. You own the ups and downs of everything inside, the fees that are deducted daily, and the liquidity the fund offers: a fund that deals monthly cannot give you your money weekly, however urgent the need. Reading those three things, holdings, costs and liquidity, is what day 2 is about.

Sources

1. Directive 2009/65/EC (UCITS), in particular Articles 22–26 (depositary) and 52 (diversification limits).
2. Directive 2011/61/EU (AIFMD).
3. Regulation (EU) 2015/760 as amended by Regulation (EU) 2023/606 (ELTIF).
4. General Assets Research Group, What are investment funds?

Quiz · day 1

Check what you learned

1. What is a fund's net asset value (NAV) per unit?

The market price set by buyers and sellers of the units The value of the fund's assets minus what it owes, divided by the number of units The management fee per unit

2. Under the UCITS rules, how much of its assets may a fund generally invest in securities of a single issuer?

5% 10% 40%

3. Who holds a fund's assets, separately from the management company?

The distributor The depositary The auditor

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