This section has been composed to answer the most frequently asked questions regarding investing. If you have not found the answer to your question here, contact our financial consultants by calling +38 (044) 390 4 390

1. Is investment into mutual funds a weighted alternative to bank deposits?
2. What is a collective investment institution (CII)?
3. What do investment funds’ securities certify?
4. What is an asset management company and what are its functions?
5. Who controls the activity of asset management companies?
6. Where does investors’ money go?
7. What mechanisms are used to protect the money of investment fund participants?
8. What expenses are covered by investment fund participants?
9. How is taxation applied in the field of collective investment?
10. How can I become an investment fund participant?
11. What assets are targeted for investment by an asset management company?
12. Can an asset management company guarantee profits from an investment?
13. What is the size of the fee for entry/withdrawal from a Fund (Premier Growth & Income Fund)?

1. Is investment into mutual funds a weighted alternative to bank deposits?

If an individual is fortunate enough to have undedicated funds on hand, he or she can be considered a potential investor while these idle funds are the capital. However, to become a full-fledged investor the individual needs to invest his/her money into something.

Recent developments on financial markets have broadened the choice of instruments and ways in which to invest money, so that it can be hard for the “common man” to sort out the wide variety of investment alternatives. However, among the most common and popular investment means are:

• Bank deposits;
• Independent investment in a securities market;
• Creation of a business;
• Purchase of an existing business or a part of it;
• Investment into a collective fund.

The easiest thing an investor can do is place his/her money in a bank deposit. In this case, the procedures are simple and straightforward: the investor simply transfers money to a bank account and receives the interest the bank pays on it. Such income is not taxed. As far as risks are concerned, they are minimal, especially when deposits are diversified. Since the risks of bank deposits are not high, income from such an investment will total only about 9%-10% per annum in foreign currency and 18%-20% in hryvnia. In such a way, under today’s volatile inflation, a bank deposit will allow just to preserve the original value of the investment from inflation.

When searching for higher profit, an investor can try to invest his money independently and select the most attractive financial markets, particularly currency or securities markets. In this case, the investor will have to demonstrate special skills and knowledge, which are rarely found among ordinary investors. However, independent asset management has a number of advantages, including personal risk control, liquidity of investments, and the option to withdraw some of the invested funds (if necessary) practically at any moment. To compare, it is impossible to withdraw money from a fixed-term deposit without losing some of the earned income.

The profitability of independent asset management, as well as the risk levels, depends mostly on the investor’s level of qualification. However, it is independent management that gives the highest profit under optimal risk levels. In such a way the investor can take prompt action regarding the structure of his/her portfolio and investment terms. Otherwise, an individual investor must bear high expenses for trade account servicing, registering operations and access to a POS terminal. Though these expenses may not seem substantial when taken separately, the investor will end up spending large amounts in case of frequent transactions. However, in the long term, expenses may be reduced by cutting the number of operations.

Another necessary evil is taxation. For independent investment in the securities market, an individual investor will have to pay a 13% tax for each operation with securities. The tax is levied on the difference between the amount drawn from the sale of the securities and expenses on their purchase, which includes the securities purchase price, brokerage commission and other recordkeeping outlays.

The money can also be put into a collective investment institution (a corporate investment fund or a mutual investment fund). The investor signs an agreement to purchase securities of a collective investment institution. The collective investment institution plays the role of a specific standardized investment portfolio, which is formed with the assets of a specific number of participants. The money of the fund’s participants is invested by the asset management company into securities, bank deposits or other assets (real estate, corporate rights, etc.).

All the abovementioned ways belong to the category of “individual capital investment” while a mutual fund is a form of “collective investment”. This means that the assets selected by the managing company are collectively owned by all the fund’s participants, and a separate investor owns only a specific portion of the aggregate capital. This part (according to the current value of the fund’s net assets) is proportionate to the amount of the fund’s securities that belong to each of the fund’s participants.

Collective investment funds are interesting to investors for several reasons. First, investment into a collective investment institution does not require professional skills. All you need to do is choose a reliable fund and an asset management company. However, the investor should have a clear view of what mutual funds and asset management companies are and what requirements are put forward as to the quality of management of investment fund assets.

Another obvious advantage of collective investment institutions is “limit risk”, since collective investments are strictly regulated by the state.

A third advantage is the taxation regime. Though participants of a mutual fund pay taxes, they do it only once, when they sell the fund’s securities.
 

2. What is a collective investment institution?

Collective investment institutions (hereinafter CII) are investment funds that conduct collective investment activity, that is attracting investors’ money with the aim to generate profits from investments into other issuers’ securities, corporate rights and real estate.
The world’s first investment fund was created in Belgium in August 1822. Active development of investment funds started only after World War II, though, when they began to compete against banks and other financial institutions. The investment fund idea quickly spread all over the world, especially in the United Kingdom and the United States. Today most American households are investors in one or another investment fund.

The first investment funds in Ukraine emerged recently, shortly after independence in 1994, and they became an important mechanism of mass privatization in Ukraine. However, at the time they were not ready for “classic” collective investment. In their “classic” appearance, from the viewpoint of nature and function, investment funds were set up in Ukraine only in 2003, after Parliament passed the law “On collective investment institutions (unit and corporate funds).”

Over the last five years the Ukrainian market of mutual investment funds has demonstrated positive growth dynamics and ensured a sufficiently high rate of investment return, which exceeded the rate of interest on bank deposits. Today, the total volume of CII assets tops UAH 6 billion. In such a way Ukrainian investors have received a new opportunity to invest their savings and an alternative to the established and low-return bank deposits. In Ukraine, collective investment institutions are represented by unit and corporate funds.

Unit investment funds (UIF) are assets belonging to investors by right of collective share ownership and are managed by an asset management company (hereinafter AMC), which keeps records of these funds’ business activity separately from its own performance results.

A unit investment fund:

• Is not a legal entity and is created by an AMC by means of sale (placement) of investment certificates issued by the company among investors;
• An AMC acts on its own behalf while signing agreements on purchase or sale of the fund’s assets;
• An AMC keeps records of the fund’s performance separately from results of its own and other mutual investment institutions’ economic activity;
• The minimum size of an asset group must be no less than 1,250 minimum wages (or UAH 500,000 as of December 1, 2006).

Corporate investment funds (CIF) are legal entities established in the form of open joint-stock companies (OJSC) and exclusively conduct collective investment activity.

A corporate investment fund:

• Is a legal entity in the form of an open joint-stock company;
• Forms its authorized capital with cash, government and other issuers’ securities admitted to trading at a stock exchange, or a trading and information system, as well as with real estate property; its statutory capital may be increased with monetary funds only;
• At least 70% of the average annual value of its assets should be invested into securities;
• Management of the fund (with respect to its assets) is done by an AMC on a contractual basis; the fund’s management bodies are the same as that of an OJSC – a General Shareholder Meeting and a Supervisory Board.

Depending on their operating procedures, CII are divided into three types:
Open-end funds. A fund or its AMC undertakes the obligation to buy out, upon an investor’s demand, the shares issued by this CII (or its AMC) at any time.
Interval funds. A fund or its AMC undertakes the obligation to buy out, upon an investor’s demand, the securities issued by this CII (or its AMC) during the time period specified in the offering memorandum, but at least once per year.
Closed-end funds. A fund or its AMC does not undertake any obligation to buy back the fund’s securities until the fund’s activity is terminated.

There are fixed-term CII and those unlimited in time.

A fixed-term fund is created only for a specific period of time as stated in the institution’s offering memorandum. The fund suspends its activity when the term ends.

A perpetual fund is created for an indefinite period of time.

A closed-end fund can be maintained only for a limited time.
Open-end and interval funds are created for an unlimited time.
Depending on the asset structure, CII are divided into two types:
Diversified CII are investment funds that meet the requirement, according to which their assets are invested into different capital market instruments. Monetary funds can be invested exclusively into securities, placed in bank deposits, or invested into other assets permitted by legislation (no more than 5% of the total asset value).

Non-diversified CII are investment funds which are not required to diversify their assets. They are allowed to invest into real estate, LLC statutory funds, etc.

Open-end and interval CII can only be diversified.

Closed-end CII may be either diversified or non-diversified.

There are also venture investment funds. These are corporate or non-diversified unit investment funds which should have no less than 50% of their assets invested in corporate rights and securities not listed on stock exchanges. Such funds perform only private placements of their securities and implement a fairly risky investment strategy, particularly investment into innovation projects.

Individuals may not be participants of venture CIF, UIF or non-diversified UIF.

What do investment funds’ securities certify?

Securities of an investment fund confirm the title of their owner to a part of the assets of a corporate investment fund or unit investment fund.

Securities of investment funds are divided into two types depending on the form of their organization (creation):

Corporate investment funds issue ordinary registered shares. Shares of a CIF, in addition to the proprietary right, confirm their owner’s right to participate in the management of the fund (CIF are created in the form of open joint-stock companies).

Unit investment funds are not legal entities, and are founded by asset management companies (AMC) in order to attract monetary resources for conducting collective investment activity. Therefore, the issuer of the securities that confirm title to a part in the unit investment fund’s assets is the AMC of this fund. Such securities are called investment certificates.

Shares and certificates of investment funds bear a nominal value. There are no restrictions as to the number of a fund’s securities that can be held by one participant. Owners of shares (investment certificates) are exposed to risks related to changes in the market value of a corporate (unit) investment fund’s assets.

Securities of open-end and interval investment funds are bought out by their issuers according to the peculiarities of each type. Investors of open-end funds may purchase or sell fund securities on any business day. Investors of interval funds can purchase or sell fund securities only during specific periods, so-called “interval opening periods”. Intervals are opened no less than once a year. The dates of opening and closing of such offers are fixed and stated in the fund’s offering memorandum and its regulations. Closed-end investment funds (or their AMC) are obliged to buy back their securities after their life spans expire.

Securities:

• of open-end investment funds are subject to restricted circulation on the secondary securities market (organized and non-organized). Dividends from such securities are neither accrued nor paid;
• of interval investment funds are subject to free circulation on the secondary securities market only during periods of the “closed” position of the funds that issued them. Dividends on such securities are neither accrued nor paid;
• of closed-end investment funds are subject to free circulation on the secondary securities market. Dividends on such securities may be accrued provided it is envisaged by the funds’ offering memorandum.

4. What is an asset management company? What are its functions?

An asset management company (AMC) is a legal entity that conducts professional management of assets of collective investment institutions (CII) on the basis of a license issued by the Securities and Stock Market State Commission.

An asset management company:

• establishes CII;
• places the securities of CII; engages agents that place securities among investors;
• manages the assets of CII; after the money is transferred to a CII’s account, the AMC uses it to purchase assets to create the fund’s portfolio with the structure specified in its investment declaration;
• experts of its analytical department analyze the markets of securities, real estate and other assets; the CII’s assets are formed with these markets’ instruments;
• experts from its investment department look for new investment objects;
• experts from its finance department perform daily revaluation of assets, draw up contracts on purchase and sale of assets, compile reports for government bodies that oversee, and regulate the activities of the AMC;
• carries out routine activities of CII.

5. Who controls the activity of asset management companies?

Asset management companies (AMC) perform their activity in accordance with the law and under constant monitoring, regulation and control from the State.

An AMC can manage collective investment institutions (CII - unit and/or corporate investment funds) only on the basis of an asset management license. An AMC is allowed to combine CII management activity only with management of non-governmental pension funds’ assets and their administration.

In order to prevent an AMC from abuse of investors’ funds, its asset management functions are separate from custody functions.

Investors’ money is kept in a bank, which performs custodian functions and controls the legality of operations with the funds. This ensures separation of the custodial functions and fund accounting from the AMC’s property.

The custodian opens a separate bank account for keeping monetary resources and performing settlement operations related to the management of the investment fund, and a securities account for bookkeeping of ownership rights for the securities that belong to the investment fund’s assets. The custodian does not have the right to administer or dispose of the fund’s assets. It ensures execution of operations with the investment fund’s assets and ensures that the AMC observes legislation, regulations and the fund’s investment declaration.

If the AMC gives the custodian an order to perform operations with the fund’s assets that might contradict legislation, the custodian does not have the right to execute such an order. It should act in the interests on investors only. If the custodian discovers that the AMC has committed a violation, it should report the violation to the State Securities and Stock Market Commission.

However, control of an AMC’s activity is not restricted to the abovementioned measures. An AMC is subject to annual auditing checks. Such checks include inspection of accounting records, record keeping procedures and compilation of reports on the funds’ assets managed by the AMC. Auditors also check the structure of the funds’ assets, etc. With such an organization of AMC and CII, investors’ money is protected from misappropriation. This also allows for protecting CII assets from problems related to the financial state of the AMC. Therefore, even bankruptcy of the AMC (as an economic entity) does not pose any threat to the funds’ assets (these assets may be transferred for management to another AMC). Apart from this, claims and liabilities of the AMC do not apply to its corporate or unit funds.

Among the main bodies that control the activity of an AMC on behalf of investors are the company’s supervisory council and shareholder meetings (for corporate investment funds). The supervisory council is formed with the investors who have purchased the AMC’s securities. These organs are especially responsible for signing and cancelling agreements with the AMC (approval of the respective decisions and agreements), and approval of agreements concerning the funds’ assets, if the amount exceeds the minimum cost indicated in the CII’s regulations.

The State controls AMCs through the State Securities and Stock Market Commission. First, an AMC should submit daily, quarterly and annual reports on the activity of its CIIs. Second, the Securities Commission checks the activity of AMCs, and if the Commission discovers violations, it applies sanctions in accordance with legislation against such companies.

Apart from this, the activity of an AMC is controlled by a custodian (a legal entity that has a corresponding license issued by the State Securities and Stock Market Commission, usually a bank).

A custodian:

• controls whether the issuance, sale, buyout, and/or cancellation of a fund’s securities comply with the regulations and offering prospectus of the funds and legislation;
• controls the activity of an AMC with regards to evaluation of the net assets of a CII, placement and redemption of CII securities, use of profits from CII assets;
• once a quarter checks whether the costs of the net assets of the funs are evaluated correctly;
• controls settlement operations with CII assets and the movement of securities belonging to CII assets;
• informs the State Securities and Stock Market Commission about any operation performed by an AMC that does not correspond with the securities offering memo or violates the CII’s regulations, laws or acts issued by the Securities Commission;
• may demand convocation of an extraordinary meeting of a corporate investment fund.

The activity of AMCs is regulated also within the framework of their membership in self-regulating organizations of professional securities market participants (particularly, Ukrainian Association of Investment Business).

6. Where is an investor’s money put?

The structure of assets of corporate or unit investment funds (CIF/UIF) largely depends on the type/kind of fund. In accordance with the Law of Ukraine “On collective investment institutes (unit and corporate investment funds)”, interval and open-end investment funds can be diversified (a kind of funds) only.

In line with the law, individuals cannot participate in non-diversified unit and venture investment funds that might be excessively risky.

There exists a list of assets allowed for investment for each type/kind of investment fund. These specificities are described in the regulations of the State Securities and Stock Market Commission regarding the structure of investment fund assets.

The list of investment objects and requirements for the structure of assets of a specific investment fund is contained in the fund’s investment declaration. The asset management company that manages the corresponding investment fund has no right to purchase with the fund’s money assets not foreseen in the fund’s investment declaration.

Instruments that can form CII assets:

• shares and bonds of Ukrainian issuers;
• shares and bonds of foreign investors;
• to support liquidity of CII, some part of their assets may be placed in bank deposits (including those in foreign currency) or consist of bank deposit certificates;
• assets of several CII may include real estate objects and/or corporate rights.

7. What mechanisms are used to protect the money of investment fund participants?

Due to the peculiarities of their functioning, investment funds represent the most effective way to reduce risks of private investors. Investment into mutual funds reduces risks because:

First of all, the rights of investors are protected thanks to the organizational structure of the investment fund management system. Such protection is also ensured by the State. The functions of management, custody and securities bookkeeping are divided among independent structures –asset management company, custodian and registrar. This scheme does not allow an AMC to withdraw assets from a fund without the custodian’s permission. The activity of the abovementioned organizations that service investment funds is also licensed and regulated by the State Securities and Stock Market Commission;

Second, the investor has the possibility to regularly access information concerning operations of the fund and the AMC, as well as the cost and structure of an investment fund’s assets. The company conducts professional asset management and performs a broad portfolio diversification;

Third, the investor can sell the fund’s securities and receive his/her money back at any moment (called redemption) (for open-end funds). In line with legislation, an AMC is obliged to buy out the fund’s securities at the current price. Therefore, there is no chance that a client will be refused cash payment.

The securities of interval investment funds may be bought out during the time periods set forth in the funds’ regulations.

The most risky business for individuals is to invest into closed-end investment funds. This is why legislation prohibits the participation of individuals in venture and closed-end non-diversified unit funds.

8. What expenses are covered by investment fund participants?

In order to reimburse the expenses on the purchase and sale of CII securities, a fund’s offering prospectus must anticipate inclusion of the agent’s commission in the securities estimated cost during placement (or withholding of such expenses during the securities buyout).

The money belonging to a fund’s assets is also used to pay fees to the AMC, services of the custodian, registrar, evaluator and auditor, and to cover other expenses related to fund management. Their total amount should not exceed 10% of the annual average cost of the investment fund’s assets. In fact, this is also a part of the fund participants’ expenses, but they are already included in the securities estimated cost at which the securities are placed or bought out. This means the expenses are indirect.

An investor is obliged to pay income tax only when his/her CII securities are sold. The taxable base is calculated as the difference between the amount from the sale of the CII securities and the amount spent on their purchase.

What does the income of an investment fund’s participants include?

An investor’s income (an investment fund participant) consists of his/her securities’ increment value and/or dividends on the fund’s securities.

The cost of the fund’s securities is based on the current cost of the fund’s net assets. The cost is calculated by dividing the net assets cost by the number of the fund’s securities in circulation.

The cost of the net assets equals the difference between the fund’s assets and its current liabilities. The assets of the CII include property (securities, deposits, monetary funds, etc.) while the liabilities consist of bills payable and reserves of deferred charges and payments.

Investors of open-end and interval investment funds do not receive income in the form of dividends. Participants of such funds receive investment income only when the asset management company buys out the fund’s securities at a price based on the cost of the fund’s net assets.

In the course of time, the cost of CII securities may rise or decrease due to changes in the market price of the securities and other assets in which the fund’s money is invested. Therefore, participants of investment funds are exposed to downside risks related to changes of the cost of the fund’s assets. Neither the State nor the AMC may guarantee the fund’s profitability. The AMC also has no right to provide any guarantees regarding the future yield of the fund’s investments.

The estimated cost of securities of an open-end CII is calculated and disclosed by the asset management company on a daily basis. The estimated cost of securities of an interval CII is established by the asset management company on the day when the company receives an application for sale or purchase of the fund’s securities.

If the market cost of the securities or other assets of the fund is rising, the cost of the fund’s securities is rising as well, and vice versa, when the market cost of the securities or other assets of the fund is decreasing, the cost of its securities is also falling.

The cost of an investment fund’s net assets changes due to purchase or sale of the fund’s securities by investors. However, it does not influence the price of the fund’s securities, since it is the number of its securities in circulation that changes.

9. What taxation is applied in the field of collective investment?

Taxation is an important factor in choosing the right collective investment institution (CII) as a means of investment, since it influences the final amount of an investor’s income.

The terms of taxation in the field of collective investment are established by the tax legislation of Ukraine, particularly the laws of Ukraine “On enterprise profit taxation” and “On individual income tax.”

It should be noted that investors’ funds are not liable to tax while they remain in an investment fund. Taxes are imposed on investors’ income when:

• the fund’s securities are sold to a third party;
• the fund’s securities are bought out from investors by the AMC (when the fund is liquidated or at any moment as requested by investors of open-end funds, or on dates specified in the offering memorandum upon request of interval fund investors);
• the investment fund pays dividends (when foreseen by the offering memorandum).
• If an investor sells CII securities, a tax is levied on the difference between their purchase price and the sale price. Investors also pay taxes on dividend incomes (only when paid).

The tax rate and assessment methods differ depending on whether the investor is an individual or legal entity, and in which of the abovementioned cases the investment income is paid. If the investor is a legal entity, its income from the fund investments is liable to a 25% tax.

When the asset management company buys out the fund’s securities belonging to an individual investor, a 13% tax is imposed on his/her income. Dividend income on a fund’s securities is liable to a 5% tax.

In line with paragraph 4.2.8. of the law of Ukraine “On enterprise profit taxation,” the funds attracted from investors, as well as receipts from operations with CII assets, or revenues from such assets are not included in taxable income. Thus, while holding a fund’s securities, you do not pay taxes until you sell these securities or until dividends are paid on these securities. When you own securities or real estate property directly, revenues from operations with these assets or incomes accrued on such assets (interest, dividends and rental fees) are liable to taxation.

As you see, investing into CII securities has a number of taxation advantages compared to direct investment into securities or real estate objects.

When an issuer pays dividends to a fund’s benefit, this issuer does not pay any advance installments, which is foreseen by the law of Ukraine “On enterprise profit taxation.” In such a way, the issuer’s expenses are reduced at the moment of dividend payments.

10. What are the ways to become an investment fund participant?

Purchase and sale of a collective investment institution’s (CII) securities are performed by an asset management company (AMC) and/or its agents. Only legal entities, which are professional participants of the securities market with brokerage service licenses, may perform the functions of the agent.

CII securities are sold on the basis of applications for purchase of securities and sales agreements. The terms of a CII securities buyout are also submitted in the form of an application. In the application, the investor indicates the number of securities he/she wants to buy (sell), the price and the total amount.

The applications for purchase and buyout (exchange) of an open-end fund’s securities are accepted on a daily basis (business days). At the same time, the applications for purchase and buyout (exchange) of an interval fund’s securities may be submitted during the periods indicated in the fund’s offering memorandum. The Foyil Premier Growth & Income Fund performs placement of its certificates on a daily basis and buys back the securities from the 10th to 15th day of February, May, August and November. Applications for purchase and buyout (exchange) of securities should be submitted to the agents for buyout and placement of the fund’s securities.

If the securities are issued in non-documentary form, the title to these securities is confirmed with a statement from the securities custodian, who maintains the investor’s securities account.

All settlements on CII securities presented for the purpose of redemption should be performed within 7 (seven) days after acceptance of the securities redemption application.

Almost every investment fund establishes a minimum amount for investment.

More details about how to become an investor of Foyil Premier Funds can be found at www.foyil.com.ua у розділі How to Become a Client.

11. What assets are targeted for investment by an asset management company?

In accordance with the law of Ukraine “On collective investment institutions (mutual and corporate funds)”, the Premier Growth & Income Fund is a diversified fund, which proves that its money will be invested in various assets. Since the fund is operated by professionals, one may be sure that they will create the investment portfolio in a competent and professional way, utilizing the experience earned from their many years in the field of investment. More details about what assets may be chosen for the fund’s investment may be found in the Investment Declaration.

12. Can an asset management company guarantee investment profits?

An asset management company has no right to provide any guarantees regarding profits from an investment, in accordance with the law of Ukraine “On collective investment institutions (mutual and corporate funds).”

13. What is the size of the fee for entry/withdrawal from the Fund (Premier Growth & Income Fund)?

Expenses on purchase/buyout of the Premier Growth & Income Fund’s investment certificates include:

• The agent’s commission of 0.9% (investment up to UAH 100,000) and 0.5% (UAH 100,000 and higher);
• Opening of a securities account with a custodian (in accordance with the custodian’s tariffs);
• Entry/withdrawal of the fund’s investment certificates to/from the securities account (according to the custodian’s tariffs).