Spreading the Risk with Collective Investment Schemes

Investors who are not in a position to dabble in a wide range of stock market investments as an individual, may want to consider a collective investment scheme, in which a group of investors share the costs as well as the benefits of wide-range investing. Depending on where you are, you may find collective investment schemes being referred to by different names, including funds, investment funds, managed funds and mutual funds – although in the US, mutual funds refers to open-end funds.

Collective investment schemes are the backbone of many large markets, accounting for a significant percentage of all trading taking place on major stock exchanges. Targeting specific geographic regions, or possibly specific sectors, collective investments generally tend to stick to the domestic market, thereby eliminating currency risk, while promoting national self-interest favored by policy makers.

There are a number of ways that collective investment schemes may be formed, including by legal trust, under company law, or by statute. The structure, scope and limitations of the scheme would be dependent on its constitutional nature, as well as tax rules applicable to its structure within its given jurisdiction. Typically a collective investment scheme would be managed by an investment or fund manager who takes responsibility for making the investment decisions. As the job title suggests, the fund administrator manages the administrative duties of the collective investment, such as trading, valuation, unit pricing and reconciliations, while the board of trustees is responsible for safeguarding the assets and ensuring compliance with the applicable laws and rules. The shareholders, or investors, have ownership of the said assets and the associated income. The collective investment scheme may also either have an in-house or outsourced marketing company to promote the fund to potential investors.

One of the more obvious advantages of collective investment is spreading the risk by investing in a range of equities. It stands to reason that the more diversified that your capital is, the lower the capital risk. While collective investments have traditionally consisted of a range of individual securities in a specific market sector, this thinking has been changing due to the fact that all shares in that sector could be affected by adverse market conditions, as has been the case in recent months. To avoid this scenario, investment managers may choose to diversify into non-aligned sectors. Another perceived benefit of collective investment schemes is reduced dealing costs, although this ‘saving’ is often negated by the fund manager’s fees.