What is a Collective Investment Scheme?

What is a Collective Investment Scheme?

A collective investment scheme is a joint investment that enables you to pool your money with other investors who have similar investment objectives. This pool of money is then invested in different assets in financial markets. It includes a wide range of local and international shares or equities (companies listed on a stock exchange), bonds, property, money market instruments and their derivatives.

The total value of the pool of invested money is split into equal portions called participatory interests of units When you invest in collective investment schemes, you buy a share of the units of the total fund. The unit price (also known as the net asset value (NAV)) is dependent on the market value of the instruments in which the pool of money is invested and therefore rises falls alongside market fluctuations.

Why invest in Collective Investment Schemes?

Collective investments schemes are an attractive investment option because they;

Spreading risk - Collective investment schemes invest in a range of underlying assets. This means that your eggs are not in one basket. Your risk is spread amongst many assets rather than amongst one or only a few. If any assets perform poorly, your investment won't necessarily perform poorly as there are other assets that may have done very well.

Easy and accessible - Collective investment schemes are a very convenient way of investing in markets which you otherwise would find difficult to access.

Offer good returns - Collective investment schemes’ returns compare more favourably with those from more other traditional investment products. The longer you leave your money invested in a collective investment scheme, the greater the opportunity for growth.

Expert decision-making - Collective investment schemes are managed by qualified investment managers, whose full-time job it is to make investment decisions.

Value for money - Collective investment schemes are designed to give you good value. The pooling of money increases buying power, enabling investment managers to buy assets which the small investor normally could not afford.

Flexible investment options - You can either invest a lump sum amount so that your entire investment immediately benefits from the growth and income potential of the chosen collective investment portfolio or make regular monthly investment, which is an easier way of building up capital.

Easy access - Collective investment schemes are liquid so you can cash in all or part of your investment at any time and have ready access to your money, often within a pre-agreed upon time.

How to choose a Collective Investment Scheme?

There are a wide and ever-increasing range of collective investment schemes available. Funds in collective investment schemes are classified as domestic, offshore, regional depending on where the funds are invested. These categories are further classified into either equity, cash, property or fixed income. Domestic and regional funds within these categories have similar risk profiles. As an investor you should note that the risk / return spectrum of a fund is dependent on the combination of underlying funds in which the fund is invested and its investment objective.

When choosing a collective investment scheme, you should identify your needs first and select a fund that best suits these:

What is your time scale?
Are you a short- or long-term investor? Although some collective investment schemes cater for short-term needs, most of them may need at least three to five years for your money to grow and so that market fluctuations are smoothed out.

What is your risk appetite?

The type of fund you choose will depend on the amount of risk you are prepared to take. Factors that can be taken into consideration are age, health, income, alternative liquid assets, knowledge, and whether you have dependants. An investor seeking security and income can select a money market fund, an income fund, an asset allocation fund or a mix thereof. If you are a more aggressive investor, you can select an equity fund that invests in a specific sector of the stock market such as financial and industrial companies, resources and basic industries or smaller companies.

Measures to protect your investment
To protect your investment in a collective investment scheme, you should check:

• if the scheme has the relevant elements of a collective investment scheme;
• whether it is an FSRA -authorised collective investment scheme; you may check the list of authorised investment schemes from the FSRA website.
• Check if the intermediary that promotes the scheme is authorised by the FSRA. Companies or agents engaged in giving advice to the investing public should be licensed by the FSRA. You may check the licensing status of an intermediary on the FSRA website or visit the FSRA offices to confirm to confirm if the entity licensed.