Investment Funds 投資基金

Mutual Fund and Unit Trust 互惠基金及單位信託

Investment funds combine money from investors to buy assets such as shares and bonds under shared investment objectives. They are collective investment schemes under the Securities and Futures Ordinance (Cap. 571). Funds may be classified by asset class, growth or income objective, industry or geographical area. As policy values under investment-linked assurance schemes are commonly linked to fund performance, intermediaries need to understand how funds operate.

A mutual fund uses a company structure. Investors hold shares in the fund company, owning the company directly and benefiting indirectly from its investments. The board elected by shareholders normally appoints a management company to manage investments. One management company may manage several funds, but each remains a separate organisation with its own board.

A unit trust is established through a trust, with a trustee holding fund assets under the trust arrangements. Investors buy units representing proportionate interests in the fund assets, rather than becoming shareholders in a fund company. Units can normally be redeemed with the fund, so investors generally need not hold them until the trust ends.

NAV per unit = (total assets − total liabilities) ÷ number of units outstanding. Deduct liabilities before dividing by the number of units. NAV measures the fund’s net assets; the actual subscription or redemption price must still be determined under the fund terms and applicable charges.

Open-end and Closed-end Funds 開放型基金及封閉型基金

An open-end fund has variable capitalisation: it may issue new shares or units when investors subscribe and cancel them when investors redeem. Subscription and redemption prices are based on the NAV of the underlying investments, with adjustments under the applicable terms and charges.

A closed-end fund issues a set number of shares at launch and normally makes few subsequent issues or repurchases. Here, ‘fixed’ mainly concerns the relatively stable number of shares outstanding; the market value of fund assets can still change. Mutual fund or unit trust describes legal structure, whereas open-end or closed-end describes issue and exit arrangements.

Investors in a closed-end fund generally trade shares in the secondary market instead of requiring the fund to redeem at NAV. Supply and demand affect the market price: a price below NAV per share represents a discount, while a price above it represents a premium. Changes in market sentiment can widen or narrow either.

The closed-end structure suits less liquid assets, such as property or some emerging-market investments, because the fund generally need not sell assets urgently to meet investor redemptions. Investors selling their shares may nevertheless face limited demand or a market-price discount, and the fund remains exposed to investment risk.

Charges and Fees of Investment Funds 投資基金的收費與費用

Sales charges cover selling and distribution costs, while management fees pay for investment management. A no-load fund is normally sold directly, has no initial sales charge and is subscribed for at NAV; early redemption fees or annual distribution fees may still apply. A front-end load is deducted once on purchase, is commonly associated with class A shares or units and generally suits longer holding periods.

A back-end load is collected on redemption and is commonly associated with class B shares or units. A contingent deferred sales charge normally applies during the early years and falls in steps to zero; an annual distribution fee, usually up to 1%, may also apply. The reference material associates this arrangement with medium-term holdings of at least 5 years. Some class B holdings convert to class A after several years, removing that distribution fee but not necessarily other fees.

A level load is commonly associated with class C shares or units: a small front-end charge applies, a small back-end charge may apply on redemption within a year, and there is a distribution fee. This arrangement is more directed towards short-term holdings and is uncommon in Hong Kong. Management fees apply separately; the specified reference material gives a usual range of 0.5% to 1% a year of the fund’s average market value, rather than merely the original investment.

The Code on Unit Trusts and Mutual Funds requires clear disclosure of the level and calculation basis of charges paid from fund assets, with percentages expressed annually and aggregate investment management and advisory fees disclosed. A performance fee calculated on a high-on-high basis is payable no more than annually and requires NAV per unit or share to exceed the level used when that fee was last calculated and paid; recovery from a low point alone is insufficient. Other charges may include administration, guarantee, trustee and custodian fees.

Benefits of Investment Funds 投資基金的好處

Pooling money gives investors access to diversification and professional management, including local, overseas and some otherwise difficult-to-access markets. Investors can select funds for growth, income and their risk tolerance. Long-term returns may exceed conventional savings, but actual performance depends on the fund and markets and is not assured.

Small units and economies of scale reduce entry barriers and spread dealing and administration costs. The specified reference material illustrates initial investments of HK$10,000 or less and subsequent or regular monthly investments as low as HK$1,000; these are not universal minimums. The fund also handles administration such as securities settlement, custody, dividend collection and rights issues.

Convenience and liquidity depend on fund terms and market arrangements: many funds allow redemption on business days, with payment generally within a few business days, but proceeds may exceed or fall below original cost. Regular prices and NAV information help investors monitor their holdings. Many funds also allow distributions to be reinvested without an extra charge and permit switching within the same fund family under their terms.

Asset custody by a trustee or custodian, together with regulatory requirements, provides investor safeguards. Public promotion of funds in Hong Kong must comply with the authorisation and advertising requirements of the Securities and Futures Ordinance, obtaining the necessary SFC authorisation unless an exemption applies. SFC authorisation does not guarantee capital or returns, and custody does not remove market losses. [SFC Code on Unit Trusts and Mutual Funds](https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/section-ii-code-on-unit-trusts-and-mutual-funds/section-ii-code-on-unit-trusts-and-mutual-funds.pdf)

Disadvantages of Investment Funds 投資基金的弊處

Professional management has a cost. Management fees are paid from fund assets and reduce investors’ net returns; an investor managing their own portfolio can avoid this fund management fee. Fund comparisons should consider sales and ongoing charges as well as published investment performance.

Investors can choose a fund and its objectives but generally cannot decide which individual shares or bonds it buys or sells. A choice of funds and switching facilities does not give investors control over each underlying investment.

Holding fund shares or units does not give investors shareholder rights in the individual companies held by the fund, such as attending those companies’ annual general meetings and voting. This is distinct from any rights investors have as holders in the fund itself; fund investors are not entirely without rights.

Roles of the Various Parties of an Investment Fund 投資基金各方的職責

The management company must be acceptable to the SFC and manage investments under the constitutive documents in holders’ interests. A company incorporated in and/or operating from Hong Kong must be appropriately licensed or registered for its regulated activities, have adequate financial resources and maintain positive net assets. It keeps fund books, prepares accounts and reports, publishes at least two reports each financial year and makes constitutive documents available for public inspection.

An authorised unit trust appoints a trustee, while an authorised mutual fund appoints a custodian, each acceptable to the SFC. Duties include controlling and safeguarding assets, taking reasonable care over subscriptions, redemptions, pricing and compliance with investment and borrowing limits, and reporting to holders on the manager’s compliance. Instructions conflicting with the constitutive documents or Code should not be carried out merely because they come from the management company.

The trustee/custodian and management company must be independent. Under the specified reference material, a common ultimate holding company does not automatically prevent this: the stated arrangement requires both to be subsidiaries of a substantial financial institution, neither to be a subsidiary of the other, no common directors and signed undertakings to act independently. Alternatively, the law where the fund is established may require them to act independently.

The management company or mutual fund directors appoint the auditor at establishment and whenever a vacancy arises. The auditor must be independent of the management company, trustee/custodian and relevant mutual fund directors, and audits the annual report. The registrar maintains the holder register; for a unit trust this may be done by the trustee or its appointee, with its location supplied to the SFC on request. Investment management, custody, audit and holder registration are separate functions.