An ‘undertaking for collective investment in transferable securities’ (UCITS) is a type of investment fund that primarily invests in securities such as stocks, bonds, short-term treasury instruments, and cash.
The significance of a UCITS investment fund lies, not only in its portfolio, but also in the fact that the European Union (EU) applies strict regulation to it. For a UCITS fund to be offered to investors, it must be authorised and continuously monitored by the financial regulators in the EU countries where it is available.
Legal requirements for investment funds once varied greatly from one country to another, which hindered cross-border investments. To make life easier, the European Commission introduced a Directive outlining rules for UCITS. The main objectives were:
- to establish a unified European market for investment funds, enabling them to be offered across all EU Member States; and
- to provide investors with greater protection.
The first European Investment Funds Directive, in 1985, focused exclusively on UCITS, particularly those targeting retail investors.
The Directive mandates that the fund:
- exclusively invest in listed securities;
- operate as an “open” fund (i.e., a collective investment scheme that can issue and redeem shares at any time); and
- diversify its investments across various securities to mitigate risks.
Investment funds outside the EU are not required to follow EU regulations, and those funds targeting a limited number of institutional investors, or investing in a specific sector like biotechnology, are automatically exempt.
However, funds intended for a broad investor base have a strong incentive to comply with EU rules. Doing so gives them a “European passport” that allows them to sell shares across the EU after approval from their home country's supervisory authority. This eliminates the need for individual licenses in each country – which reduces administration and other formalities, costs, and the amount of time it takes to access foreign markets.
Furthermore, the strict regulation and monitoring of UCITS funds provide a high level of investor protection, making it a compelling marketing point. As a result, the term “UCITS” has become a recognised quality label, valued by regulators and the worldwide investment community.
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