What are UCITS?

UCITS stands for Undertakings for Collective Investment in Transferable Securities. They are investment funds that are regulated by the European Union (EU) and can be sold across the EU without additional authorisation. UCITS funds are designed to offer investors a high level of protection, transparency and liquidity. They are similar to mutual funds in the US, but with some differences in terms of investment rules and tax treatment.

UCITS funds can invest in a variety of financial instruments, such as shares, bonds, money market instruments, derivatives and other funds. They must follow strict rules on diversification, risk management, leverage, valuation and disclosure. UCITS funds are supervised by the national authorities of the member state where they are registered, but they also have to comply with the EU directives and guidelines that apply to them.

UCITS funds are popular among investors who want to access a wide range of markets and strategies, while benefiting from the safety and convenience of a harmonised regulatory framework. According to the European Fund and Asset Management Association (EFAMA), UCITS funds accounted for about 75% of the total assets under management of European investment funds as of June 2021

What are the benefits of UCITS funds?

Some of the main benefits of investing in UCITS funds are:

• Protection: UCITS funds have to meet high standards of investor protection, such as keeping the fund’s assets separate from those of the fund manager, appointing an independent custodian and auditor, and providing clear and regular information to investors. UCITS funds also have to limit their exposure to any single issuer, market or counterparty, and use derivatives only for hedging or efficient portfolio management purposes. In case of a fund’s liquidation, investors have a preferential claim over the fund’s assets.
• Transparency: UCITS funds have to publish a simplified prospectus or a key investor information document (KIID) that provides essential information about the fund’s objectives, risks, costs and past performance in a concise and understandable format. UCITS funds also have to disclose their portfolio composition, net asset value (NAV), fees and charges, and voting policy on a regular basis. Investors can access this information on the fund’s website or request it from the fund manager or distributor.
• Liquidity: UCITS funds have to offer investors the possibility to redeem their shares or units at least twice a month, and in some cases daily or weekly. The redemption price has to be based on the current NAV of the fund, which has to be calculated at least once a day. UCITS funds also have to maintain a sufficient level of liquidity to meet redemption requests and avoid excessive dilution of the fund’s value.
• Diversification: UCITS funds can invest in a broad range of financial instruments and markets, allowing investors to diversify their portfolio and reduce their risk. UCITS funds can also invest in other UCITS funds or alternative investment funds (AIFs) that comply with certain conditions, such as being subject to equivalent supervision and disclosure requirements. UCITS funds can also use derivatives to gain exposure to different asset classes, sectors, regions or strategies, as long as they do not exceed the limits on global exposure and counterparty risk.
• Choice: UCITS funds offer investors a wide choice of investment styles, strategies and objectives, ranging from passive index-tracking funds to active funds that seek to outperform a benchmark or generate absolute returns. UCITS funds can also cater to different investor profiles, preferences and goals, such as income, growth, capital preservation, ethical investing or thematic investing. UCITS funds can also be structured in different legal forms, such as open-ended investment companies (OEICs) or contractual funds (FCPs), depending on the jurisdiction and the fund manager’s preference.

What are the risks of UCITS funds?

As with any investment, UCITS funds involve some risks that investors should be aware of and understand before investing. Some of the main risks of UCITS funds are:

• Market risk: UCITS funds are subject to the fluctuations of the markets and the prices of the underlying instruments they invest in. Depending on the fund’s strategy and asset allocation, the fund’s value may rise or fall due to various factors, such as economic conditions, political events, interest rates, exchange rates, inflation, market sentiment, supply and demand, or company-specific issues. Market risk may affect the fund’s performance and the investor’s return.
• Credit risk: UCITS funds that invest in debt securities, such as bonds or money market instruments, are exposed to the risk that the issuer or the counterparty may default on its obligations or suffer a downgrade in its credit rating. Credit risk may result in the loss of part or all of the principal and interest payments due to the fund, and may also affect the market value and liquidity of the securities. Credit risk may vary depending on the quality, maturity and diversification of the fund’s debt portfolio.
• Liquidity risk: UCITS funds that invest in illiquid or thinly traded instruments, such as unlisted securities, private equity, real estate or commodities, may face difficulties in buying or selling them at a fair price and in a timely manner. Liquidity risk may increase the volatility and uncertainty of the fund’s NAV, and may also prevent the fund from meeting redemption requests or rebalancing its portfolio. Liquidity risk may be exacerbated by market disruptions, regulatory changes or investor behaviour.
• Operational risk: UCITS funds are subject to the risk of human error, fraud, system failure, cyberattack or other events that may affect the fund’s operations, administration, accounting, valuation, custody or distribution. Operational risk may cause losses or damages to the fund or its investors, and may also impair the fund’s reputation and trustworthiness. Operational risk may be mitigated by the fund manager’s internal controls, risk management procedures, contingency plans and compliance with the UCITS regulations and best practices.
• Currency risk: UCITS funds that invest in instruments denominated in currencies other than the fund’s base currency are exposed to the risk of changes in the exchange rates between the currencies. Currency risk may affect the fund’s NAV and the investor’s return, either positively or negatively, depending on the direction and magnitude of the currency movements. Currency risk may be hedged or unhedged by the fund manager, depending on the fund’s objective and policy.

How to invest in UCITS funds?

Investors who are interested in investing in UCITS funds should follow these steps:

• Define your investment objectives and risk profile: Before investing in any fund, you should have a clear idea of what you want to achieve with your investment, how much risk you are willing to take, and how long you are planning to invest for. You should also consider your personal circumstances, such as your income, expenses, assets, liabilities, tax situation and financial goals. You should only invest in funds that match your objectives and risk profile, and that you understand and are comfortable with.
• Research and compare different UCITS funds: Once you have defined your investment criteria, you should do some research and compare different UCITS funds that meet your requirements. You should look at various aspects of the funds, such as their investment strategy, asset allocation, performance, fees, risks, ratings and reviews. You should also read the fund’s prospectus or KIID, which provide detailed information about the fund’s features, terms and conditions. You can use online platforms, tools and resources, such as fund databases, comparison websites, calculators, newsletters and blogs, to help you with your research and comparison.
• Choose a suitable UCITS fund and a distribution channel: After you have done your research and comparison, you should choose a UCITS fund that suits your investment objectives and risk profile, and that you are confident and satisfied with. You should also choose a distribution channel that is convenient and cost-effective for you, such as a bank, a broker, a financial adviser, a platform or a fund manager. You should check the availability, accessibility, reliability and reputation of the distribution channel, as well as the fees and charges that they may apply.
• Buy and monitor your UCITS fund: Once you have chosen your UCITS fund and your distribution channel, you can buy your fund by filling in an application form and providing the required documents and information. You should also pay the initial subscription fee, if any, and the ongoing management fee, which are deducted from the fund’s NAV. You should monitor your UCITS fund regularly, by checking its NAV, performance, portfolio composition, risk indicators and other relevant information. You should also review your investment objectives and risk profile periodically, and adjust your fund allocation accordingly, if necessary.
• Sell and redeem your UCITS fund: When you want to sell or redeem your UCITS fund, you should submit a redemption request to the fund manager or the distributor, and provide the required documents and information. You should also pay the redemption fee, if any, and the exit tax, if applicable, which are deducted from the fund’s NAV. You should receive the redemption proceeds within the time frame specified by the fund, which is usually a few days or weeks. You should also report your capital gains or losses, if any, to the relevant tax authorities.