The UCITS Directive creates a harmonised framework for investment funds. It specifies the core features of this financial product such as risk-diversification, redemption of units at the request of unit-holders, regular valuation, and oversight by a depositary.
The UCITS Directive also contains detailed provisions setting out the assets which are eligible for investment by UCITS. Revision of the UCITS Directive (“UCITS 3”) has expanded this list beyond transferable securities to include money market instruments, units of UCITS and other collective investment undertakings as well as banking deposits. The amendments also allow UCITS managers to manage index-replicating UCITS and to make greater use of derivatives. Financial derivative instruments may not only be used for the purposes of hedging, but also to increase return.