WHAT IS A COLLECTIVE INVESTMENT SCHEME?
We’ve all heard the adage “Don’t put all your eggs in one basket” which we know to mean that it is wise to diversify. That is, we should spread our investments among different asset classes so that if one suffers losses, the entire portfolio will not be lost as there would be other assets in the portfolio to offset the loss-making ones. But is there a type of investment or investment vehicle that can provide such a solution without you having to burden yourself with the time-consuming task of analysing multiple companies to determine which to include in your portfolio? The answer is YES and that’s where collective investment schemes come into play.
A collective investment scheme is a financial vehicle that pools the funds from several investors, such as yourself, which will then be used to invest in a variety of financial assets such as stocks, bonds and money market instruments. These funds are managed by professional money managers who decide where to invest the fund’s assets to produce gains or income for the fund’s investors. They will therefore do all the “homework” for you since they have the expertise, experience and resources to actively monitor investments and make informed decisions on a portfolio on a full-time basis.
BENEFITS OF A COLLECTIVE INVESTMENT SCHEME
Apart from your funds being professionally managed, some other key benefits that collective investment schemes offer include:
Diversification – As mentioned earlier, participating in a collective investment scheme is an easy way to diversify your investments across many securities. If one investment decreases in value, another investment in the portfolio may increase thereby limiting the prospect of losing the value of your entire portfolio.
Affordability – For many people, it would be more costly to purchase directly all of the individual securities held by a single collective investment scheme. By contrast, the minimum initial investments for most collective investment schemes are more affordable. For example, if you had just $1,000 to invest, it would be difficult for you to assemble a basket of stocks or bonds with that amount. On the other hand, if you invested in a collective investment scheme, you would be able to gain exposure to many more types of stocks or bonds with that same $1,000.
Liquidity – Collective investment schemes usually allow for the buying and selling of the investment with relative ease. In general, you can sell your collective investment schemes in a short period unlike many other security types, such as individual stocks where you would need to find a buyer when it’s time to unload your shares. Instead, the vast majority of collective investment schemes offer daily redemptions, meaning that the collective investment scheme will give you cash whenever you’re ready to sell.
Regulation – Collective investment schemes are usually heavily regulated investment vehicles. In the case of the eastern Caribbean, the Eastern Caribbean Securities Regulatory Commission (ECSRC) is tasked with the responsibility. While being regulated does not make the investment risk-free, it does provide a layer of protection to investors. Additionally, as with other types of companies, collective investment schemes have corporate governance structures inclusive of boards of directors that represent the fund’s shareholders. Among other duties, the board is responsible for ensuring that the best available managers are running the fund and that shareholders aren’t overpaying for the managers’ services.
TYPES OF COLLECTIVE INVESTMENT SCHEMES
Now that we have an understanding of what a collective investment scheme is and some of its key benefits, we will now explore some of the main types of collective investment schemes you can invest in. Collective investment schemes are usually categorized based on the types of securities they invest in. These include:
Money Market Fund – A money market fund is a kind of collective investment scheme that invests in highly liquid and short-term instruments, i.e., instruments with maturities less of than 1 year. These instruments include cash, cash equivalent securities, and high quality, debt-based securities such as U.S. Treasuries. These funds are appropriate for investors who are extremely risk averse and/or who have a very short investment time horizon.
Income Fund – An income fund is a type of collective investment scheme that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital gains or appreciation. Such funds usually hold a variety of government, municipal (local government), and corporate debt obligations and money market instruments.It’s designed for investors who want higher returns when compared to a money market fund but also to stay safe or conservative and for those who don’t want to lose their investment.
Balanced Fund – A balanced fund is a collective investment scheme that contains a stock component, a bond component, and sometimes a money market component in a single portfolio. Balanced collective investment schemes have holdings that are balanced between equity and debt, with their objective somewhere between growth and income.The investors in these funds are ok with taking more risk in order to get higher returns.
KEY TAKEAWAYS
Collective investment schemes are a financial vehicle that can provide a convenient way to invest in stocks, bonds, and other securities. These funds are professionally managed and provide diversification. You can also choose funds based on their investment objectives and how those objectives match your own. So, if you are new to investing or don’t have the time or desire to research multiple companies and manage a portfolio, investing in a collective investment scheme may be something worth considering.