Most of us are probably familiar with the saying, “More hands make work easier.” Ideally, this means people banding together for a cause. Speculating that collective investment schemes were also born on similar principles is partially correct.
Simply put, a collective investment scheme is a group of people coming together and pooling their funds into one asset. The income earned from the assets will be distributed among the groups based on their investment percentages.
What do Collective Investment Schemes Means?
A collective investment scheme (CIS) is a type of investment vehicle that allows a group of investors to pool their money together and invest it in various assets. For Eg:- Mutual Funds, Exchange-Traded Funds (ETFs), Hedge Funds, Real Estate Investment Trusts (REITs), Private Equity Funds.
This can be a more efficient way to invest, as it allows investors to access a broader range of assets and to benefit from professional management.
CISs are regulated by the Securities and Exchange Board of India (SEBI), which ensures that they are transparent and that investors’ interests are protected. There are several types of CISs available, each with its own set of features and benefits.
Features of Collective Investment Schemes (CIS)
The main features of the collective investment scheme are:
Professional management
A professional fund manager manages the CIS. These experts analyse market trends, conduct research, and select appropriate investments in line with program objectives.
Diversification
The program provides investors with a diversified portfolio across asset classes, sectors and geographic regions. Portfolio diversification helps reduce the impact of poor performance of individual investments on the overall portfolio.
Ownership Through Shares
Investors in a collective investment scheme own shares representing a proportional ownership interest in the scheme. The value of these units is directly related to the underlying asset’s performance. Investors can buy and sell units/shares, providing liquidity and flexibility in investment management.
Transparent reporting
CIS typically provides investors regular reports disclosing the system’s financial information, performance, and holdings. This transparency helps investors monitor their investments and make informed decisions.
Regulatory oversight
CIS is subject to regulation in most jurisdictions. Regulators issue rules and regulations to protect the interests of investors, ensure transparency and promote fair practices in the operation and management of collective investment schemes.
Investment Objectives and Strategies
Each CIS has its investment objectives and strategies. Some programs focus on increasing capital and aiming for long-term growth. Other plans focus on generating income through dividends or interest payments. A system’s investment strategy describes the types of assets and risk profiles to follow.
Accessibility and Affordability
CIS provides access to investment opportunities that are difficult for individual investors to access or fund. By bundling funds, investors can benefit from economies of scale, professional management and reduced transaction costs.
Risk Associated with Collective Investment Schemes
There are also some risks associated with investing in a CIS, including:
- Market risk: The value of CISs can fluctuate in line with the market, so there is a risk of losing money.
- Manager risk: The performance of a CIS can depend on the fund manager’s skill. If the manager makes poor investment decisions, the value of the CIS could suffer.
- Liquidity risk: CISs may not be as liquid as other investments, such as stocks or bonds. It means that it may be challenging to sell your units quickly if you need to access your money.
Who are the participants in collective investment schemes?
Collective Investment Scheme (CIS) participants in India include various companies and individuals. The most common participants involved in CIS are:
| Participants |
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| Sponsor |
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Asset Management Company(AMC) |
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Trustee |
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| Investor |
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| Distributors |
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Conclusion
Collective Investment Schemes can be an excellent way to invest in the long term. However, it is crucial to understand the risks involved before you invest. If you are considering investing in this scheme, research and choose a scheme appropriate for your investment goals and risk appetite.
