Study CISUT as one chain, not six topics: a unit holder subscribes, a trustee holds the assets, a manager invests under the SEC's framework, the fund is valued to a NAV per unit, and results are measured against a benchmark. At every step the examinable question is the same — who acts, under what authority, and which figure is correct at that moment. Work through the scenarios and rubric below with that chain in mind.
Unit trust, company-managed CIS, or closed-end fund: why the legal form changes the answer
A unit trust is a trust arrangement: units represent beneficial interests in trust assets held by a trustee. A CIS run through a company issues shares, and a closed-end fund does not stand ready to redeem on demand.
Test yourself with the form first before touching any calculation. In an open-ended unit trust, a new subscription creates new units and a redemption cancels them, so the number of units in issue moves with investor flows. In a closed-end structure, the pool of shares or units is fixed; buyers and sellers trade existing interests between themselves, and the price is set by the market rather than by the fund's own valuation desk.
This distinction drives at least three other syllabus areas: who holds the assets (a trustee for a trust, a custodian arrangement for a company form), how pricing works (valuation-based NAV versus market-determined price), and how liquidity pressure behaves (redemption demand affects the trust directly, but a closed-end fund only sees it in its market price). When a question mixes these, resolve the legal form before answering anything else.
Manager, trustee, custodian, unit holders: separating the four roles people blur
The manager makes investment and day-to-day decisions; the trustee holds trust assets and safeguards unit holder interests; custodians safekeep securities; unit holders own the beneficial interest and bear the risk.
The manager and the trustee have deliberately opposing functions, and that separation is the point. The manager wants to pursue performance; the trustee exists so the assets are not in the manager's own hands. The trustee monitors whether the manager operates within the trust deed and applicable rules, while the manager runs valuation, dealing and administration. A custodian, where used, adds another layer of safekeeping for securities — do not treat the custodian label as a synonym for the trustee.
Unit holders are not passive customers: they have rights set out in the trust deed, such as receiving reports and, in some structures, voting on specified matters, but they do not direct investments day to day. A quick drill: take any statement about fund activity and label it M, T, C or U — 'decides to buy listed equity' is M; 'holds the cash and scrip of the fund' is T or C; 'receives annual accounts' is U. If you cannot label it, you have not understood the structure yet.
The regulatory chain in Sri Lanka: which instrument binds which participant
In Sri Lanka, collective investment schemes and unit trusts operate under the Securities and Exchange Commission's framework; the SEC Act No. 19 of 2021 replaced the earlier SEC Act of 1987 and its amendments.
Anchor your regulatory revision in one fact from the regulator itself: the Securities and Exchange Commission of Sri Lanka states that the SEC Act No. 36 of 1987, as amended by Acts No. 26 of 1991 and No. 18 of 2003, has been repealed and replaced by the SEC Act No. 19 of 2021. When a question asks about the governing statute, distinguish this primary legislation from subsidiary rules, guidelines and directives issued under it.
Then map obligations to parties rather than memorising rules as a flat list. Licensing or registration requirements attach to market intermediaries and scheme operators; conduct and disclosure obligations shape what the manager and trustee must tell unit holders; investor-protection provisions underpin the whole arrangement. The SEC's own 'Capital Market at a Glance' page tracks counts of registered unit trusts and managing companies, but those figures change over time, so treat any number you see as a dated snapshot, not a fixed fact to memorise.
Valuation and pricing: computing NAV per unit and knowing when it applies
Net asset value per unit equals total fund assets minus liabilities, divided by units in issue. It is the basis for subscription and redemption prices in an open-ended fund, not the price of a listed closed-end share.
Work the arithmetic until it is automatic, and pay attention to what enters the calculation. Assets are valued at their recognised basis — for listed securities, a market-related price as of the valuation point; liabilities include payables, accrued fees and other obligations of the fund. Units in issue must be the number outstanding at that valuation point, because a large creation or cancellation on the same day changes the denominator.
The conceptual trap is applying NAV in the wrong context. An open-ended unit trust transacts with investors at prices derived from NAV, typically around a dealing spread or load; a closed-end fund's units trade on an exchange at whatever supply and demand produce, which can sit above or below NAV. If a question gives you a market price and an NAV for the same unit and asks what a redeeming investor receives, the legal form of the fund — not the more attractive number — decides the answer.
Worked scenario one: a pricing error on redemption day
A valuation mistake that flows into redemption prices must be corrected by restating the NAV and compensating affected transactors, because unit holders who transacted at the wrong price were dealt with outside the fund's rules.
Scenario: A fund's accountant values a block of listed shares at the previous day's closing price instead of the current valuation point's price. The overstated NAV per unit is used to pay redemptions during the day. A plausible learner response is to say only that 'the price was wrong' — that identifies nothing actionable. The better analysis runs along the chain: identify which valuation input failed, recompute the correct NAV per unit, determine which subscriptions and redemptions were struck at the erroneous price, and correct each affected transaction so that no unit holder gains or loses from the error.
Why it matters: pricing is not an internal bookkeeping detail — it is the mechanism that keeps every unit holder treated equally. If redeeming investors were paid at an inflated NAV, the remaining unit holders effectively bore the loss; if it had been understated, redeemers were shortchanged. The corrective principle is restitution to the affected transactors at the properly computed price. In your revision, always finish a pricing-error question by asking who is restored to what position, not merely that an error exists.
Worked scenario two: judging performance with the wrong return or the wrong benchmark
Compare a fund only against a benchmark matching its mandated asset class and strategy, and use total return — including income — rather than price change alone, or the comparison measures something other than manager skill.
Scenario: An equity-oriented unit trust reports a 9% price return in a year in which its benchmark index delivered 12% price return but the fund also distributed substantial dividend income. A learner's plausible mistake is to conclude the fund underperformed on the numbers as presented. The better decision is to rebuild both sides on the same basis: compute the fund's total return adding distributions, and the benchmark's total return including reinvested dividends, then compare like with like.
Why it matters: return definitions and benchmark choice are examinable precisely because they change the conclusion. A price-only comparison penalises income-generating strategies; a mismatched benchmark — say, a broad market index against a fund mandated to a narrower segment — rewards or punishes the manager for exposures the mandate never allowed. When revising performance measurement, practise restating any comparison so both figures share a return definition, a period, and a benchmark consistent with the fund's investment objectives and restrictions.
Risk management and operations: what the manager must control and document
Investment operations questions test internal controls: adherence to investment restrictions, dealing procedures, segregation of fund assets, and monitoring of market, liquidity and counterparty exposures against the mandate.
Link risk topics back to the participant chain instead of studying them as an isolated chapter. Investment restrictions and permitted asset classes come from the regulatory framework and the trust deed; the manager is responsible for staying within them; the trustee's oversight function provides a check. Operational risks — errors in trade settlement, mixing fund assets with the manager's own, delays in NAV publication — all become unit holder problems because the fund, not the manager, owns the consequences.
A useful revision lens for each risk type is: what is the exposure, who within the chain is responsible for controlling it, and what evidence of control exists (limits, reconciliations, independent valuation input, trustee review). If you can answer all three for market risk, liquidity risk from redemption pressure, and operational risk from pricing errors, you have connected the risk syllabus to the structural syllabus — so practise building those connections yourself when you revise, because the concepts themselves are intertwined.
A practical exercise: build and audit your own participant-and-price map
Draw the full chain for one imaginary fund — subscription, custody, investment, valuation, dealing, reporting — then audit it against a checklist; gaps in your map reveal gaps in syllabus coverage.
Exercise: invent a fund — for example, the 'Island Balanced Unit Trust' with 10,000,000 units in issue, listed equities worth 120,000,000 in local currency, government securities worth 40,000,000, and liabilities of 8,000,000. Compute NAV per unit (total assets 160,000,000 minus liabilities 8,000,000 = 152,000,000; divided by units = 15.20). Then write one sentence naming the responsible participant for each stage: who received the subscription money, who holds the assets, who chose the securities, who computed the 15.20, and who received the report.
Expected observations and rubric: a complete map names the trustee for custody, the manager for investment and valuation, and unit holders for the beneficial interest — four labels or fewer means your role separation is thin. Self-check against these milestones (learning indicators, not pass predictions): you can compute NAV per unit in under a minute; you can state which participants a pricing error harms; you can explain why a closed-end fund's price can deviate from NAV. If any milestone fails, return to the matching section above rather than rereading everything.
| Feature | Open-ended unit trust | Closed-end fund | Company-form CIS |
|---|---|---|---|
| Units or shares on investor demand | Units created on subscription, cancelled on redemption | Fixed pool; no standing redemption | Shares issued per the company's own process |
| Price an investor deals at | Derived from NAV per unit at the valuation point | Market price on the exchange; may differ from NAV | Depends on structure; check whether NAV-based dealing applies |
| Who holds fund assets | Trustee under the trust deed | Custodian arrangement per the fund's constitution | Custodian arrangement for the company's scheme assets |
| Oversight party | Trustee monitors the manager against the deed and rules | Trustees or directors as the constitution provides | Directors and custodian, subject to the applicable CIS rules |
| Liquidity pressure shows up as | Actual creations and cancellations of units | Premium or discount to NAV in the market price | Varies with redemption terms in the scheme documents |
References and further reading
Use these references to explore the concepts and check the latest information from the relevant organizations.