There are huge risks involve in investing in a company whose shares are traded on the stock market. For individuals, these risks can mitigate by investing in a fund that invests in several companies and thus is less likely to suffer from a single bad investment.
But since most funds are too large to invest directly, they are pool together into mutual funds or collective investment schemes (CIS). These groups of funds share a common investment objective to achieve a particular return, usually higher than the return you’ll get by investing in an individual fund.
Collective Investment Schemes (CIS) work like any other mutual fund or unit-linked plan scheme. You buy shares through the scheme and pay a management fee for managing your investments. The returns you make on your investments are then pool into the scheme’s overall returns.
In financial markets, it is normal to have “investment style” diversification across different types of stocks and other exposures within one fund. Thus, even though you invest in just two stocks, you may still have exposure to different types of assets such as real estate, private equity and others.
However, CIS investors are not diversified across different asset classes as they don’t have direct exposure to different types of assets. Instead, they have a
Collective Investment Scheme Participants
A CIS can take many forms, including:
- Unit Trusts
- Open-Ended Investment Companies (“Oeics”)
- Investment Trusts
Eligibility criteria for registration of Collective Investment Management Company
The following are the eligibility criteria for registration of Collective Investment Scheme Company:-
- The applicant should be a company incorporate in India under the Companies Act;
- The sole purpose of the company should to carry on the business of collective investment management;
- The board of directors of the company should consist of at least seven directors of whom Four directors should be independent directors;
- Four alternative directors should appoint to act in place of any director who is unable to act for any reason;
- At least two-thirds of the directors should be ordinarily resident in India; and
- The chairman and at least half of the total number of directors, excluding alternate directors, should have adequate knowledge and experience for a minimum period of five years in dealing with finance, accountancy, law, management or securities market.
Pros of Investing in Collective Investment Schemes
- Diversification: One of the main benefits of investing in funds is that they provide instant diversification. By investing across multiple asset classes, you can help reduce the overall risk of your portfolio.
- Professional Management: Funds are managed by professional money managers who have access to the latest research and information on financial markets. They have an objective and disciplined approach to investing, which helps investors avoid emotional mistakes such as selling out of fear or buying due to greed.
- Convenience & Flexibility: Investing in funds is convenient because it’s easy to buy and sell units through the fund manager at the prevailing fund price. However, it is important to remember that past performance is no guarantee of future results.
- Costs: While certain fees are associated with funds, funds tend to be less expensive than other types of investments because you share costs among all investors.
Cons of Investing in Collective Investment Schemes
Competition from other Investors: It can be difficult for a money manager to beat the market consistently over time, particularly if they are managing large amounts of money for thousands or millions of investors.