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A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than may be feasable for a individual investor and to share the costs of doing so.
Terminology varies with country but collective investment schemes are often refered to as managed funds, mutual funds or simply funds (note: mutual fund has a specific meaning in the US). Around the world large markets have developed around collective investment and these account for substantial proportion of all trading of major stock exchanges.
Collective investments are promoted with a wide range of investment aims etiher targeting specific geographic regions (e.g. Emerging Europe) or specified themes (e.g. Technology). Depending on the country there is a normally a bias towards the domestic market to reflect national self-interest, familiarity and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment preformance and other factors such as fees.
Generic Information - Structure
Constitution and Terminology Collective investment schemes may be formed under company law, by legal trust or by statute. The nature of the scheme and it's limitations are often linked to it's constitutional nature and the associated tax rules for the type of structure within a given juristiction. Corporations law or corporate law is the law concerning the creation and regulation of corporations. ...
For trusts in senses other than the legal sense, see trust; for the law of trusts in the USA see Trust (Law) USA. A trust is the legal term for a situation where one person, known as a trustee, holds assets for the benefit of another person, known as a...
A statute is a formal, written law of a country or state, written and enacted by its legislative authority, perhaps to then be ratified by the highest executive in the government, and finally published. ...
Typically there is:
- A fund manager or investment manager who manages the investment decisions.
- A trustee or board who safeguards the assets and ensures compliance with the laws and rules.
- The shareholders or unitholders who own (or have rights to) the assets.
Please see below for detailed information on specific forms of scheme in different jurisdictions.
Net Asset Value The Net Asset Value or NAV is the value of a scheme assets less the value of its liabilities. The method for calculating this varies between scheme types and jurisdiction and can be subject to complex regulation.
Open-ended fund An open-ended fund is equitably divided into shares (or units) which vary in price in direct proportion to the variation in value of the funds net asset value. Each time money is invested new shares or units are created to match the prevailing share price; each time shares are redeemed the assets sold match the prevailing share price. In this way there is no suply or demand created for shares and they remain a direct reflection of the underlying assets.
Closed-ended fund A closed-ended fund issues a limited number of shares (or units) in an initial public offering (or IPO). The shares are then traded on a exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares are high they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the scheme if demand is high although this may affect the share price.
The added element of market forces tends to amplify the performance of the fund increasing investment risk through increased volatility. Generally, amplification is a basic process sometimes seen in nature, and often used in processes which involve a signal which must be made stronger. ...
Volatility is the standard deviation of the change in value of a financial instrument with a specific time horizon. ...
Gearing / Leverage Some collective investment schemes have the power to borrow money to make further investments; a process known as gearing or leverage. If markets are growing rapidly this can allow the scheme to take advantage of the growth to a greater extent than if only the subscribed contributions were invested. However this premise only works if the cost of the borrowing is less than the increased growth achieved. If the borrowing costs are more than the growth achieved a net loss is made.
As is no doubt clear, this can greatly increase the investment risk of the fund by increased volatility and exposure to increased capital risk.
Gearing was a major contributory factor in the collapse of the split capital investment trust debarcle in the UK in 2002.
Limited Duration Some schemes are designed to have a limited term with enforced redemption of shares or units on a specified date.
Unit or Share Class Many collective investment schemes spilt the fund into multiple classes of shares or units. The underlying assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the fund's assets.
These differences are supposed to reflect different costs involved in servicing investors in various classes; for example:
- One class may be sold through broker or financial adviser with a intial commission (front-end load) and might be called retail shares.
- Another class may be sold with no commission (load) direct to the public called direct shares.
- Still a third class might have a high minimum investment limit and only be open to financial institutions, and called institutional shares.
In some cases, by aggregating regular investments by many individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase "institutional" shares (and gain the benefit of their typically-lower expense ratios) even though no members of the plan would qualify individually. This article needs to be cleaned up to conform to a higher standard of quality. ...
The job of a Financial Adviser is to offer financial advice. ...
The 401(k) plan is a type of retirement plan available in the United States. ...
Generic Information - Advantages
Diversity and Risk One of the main advantages of collective investment is the reduction in investment risk (capital risk) by diversification. An investment in a single equity may do well, but it may collapse for investment or other reasons (e.g. Marconi, Enron). If your money is invested in such a failed holding you could lose your capital. By investing in a range of equities (or other securities) the capital risk is reduced. Diversification is a measure of the commonality of a population. ...
The Marconi Corporation plc is a radio, telecommunication, and internet equipment manufacturing company, formerly known as The General Electric Company (GEC) and Marconi plc. ...
Enron Corporation Enron Corporation is an energy trading and communications company based in Houston, Texas that employed around 21,000 people in mid-2001 (before bankruptcy). ...
- The more diversified your capital, the lower the capital risk.
This investment principle is often referred to as spreading risk.
Collective investments by their nature, tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk investment managers may diversify into different non-correlated asset classes. For example the British Aristocracy are said to traditionally hold their assets in equal parts in equities, real estate and fixed interest securities. If any one of the three is failing, because each is non-correlated (i.e. behaves independently) then by logical extension at least one of the other two is doing well. Term used in the context of financial planning, referring to the method of diversifying an investment portfolio across a wide variety of asset classes. ...
The term Market Sector is used in economics and finance to describe a set of businesses that are buying and selling such similar goods and services that they are in direct competition with each other. ...
Term used in the context of financial planning, referring to the method of diversifying an investment portfolio across a wide variety of asset classes. ...
The Ancient Greek term aristocracy meant a system of government with rule by the best. This is the first definition given in most dictionaries. ...
Ownership equity, commonly known simply as equity, also risk or liable capital, is a financial term for the difference between a companys assets and liabilities -- that is, the value that accrues to the owners (sole proprieter, partners, or shareholders). ...
Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ...
Reduced Dealing Costs If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits). Pooling your money with that of other investors means you have the advantages of buying in bulk making dealing costs an insignificant part of the investment.
Generic Information - Disadvantages
Costs The fund manager running the managing the investment decisions on behalf of the investors requires remuneration. This is often taken directly from the from the fund assets as a fixed percentage each year or sometimes a variable (performance based) fee. If the investor managed their own investments, this cost would be avoided.
Often the cost of advice given by a stock broker or financial adviser is built into the scheme. Often referred to as commission or load (in the US) this charge may be applied at the start of the plan or as an ongoing percentage of the fund value each year. Whilst this cost will diminish your returns it could be argued that it reflects a separate payment for an advice service rather than a detremental feature of colective investment schemes. Indeed it is often possible to purchase units or shares direct from the providers without baring this cost. This article needs to be cleaned up to conform to a higher standard of quality. ...
The job of a Financial Adviser is to offer financial advice. ...
In law a commission is a patent which allows a person to take possession of a state office and carry out official acts and duties. ...
Load is what is carried, or a force. ...
Wikiquote has a collection of quotations by or about: United States Wikinews has news related to this article: United States United States government CIA World Factbook Entry for United States House. ...
Lack of choice Although the investor can choose the type of fund to invest in, they have no control over the choice of individual holdings that make up the fund.
Loss of owner's rights If the investor holds shares direct, they may be entitled to shareholders' perks (for example, discounts on the company's products) and the right to attend the company's annual general meeting and vote on important matters. Investors in a collective investment scheme often have none of the rights connected with individual investments within the fund.
Style
Investment aims and benchmarking Each fund has a defined investment goal to describe the remit of the investment manager and to help investors decide if the fund is right for them. The investment aims will typically fall into the broad category of Income or Growth. Funds are often distinguished by asset based categories such as equity, bonds, properties etc. Also, perhaps most commonly funds are divided by their georgrahic markets or themes. Examples - The largest markets - US, Japan, Europe, UK and Far East are often divided into smaller funds eg. US large caps, Japanese smaller companies, European Growth, UK mid caps etc.
- Themed funds - Technology, Healthcare, Socially responsible funds
Wikiquote has a collection of quotations by or about: United States Wikinews has news related to this article: United States United States government CIA World Factbook Entry for United States House. ...
A satellite composite image of Europe Europe is the worlds second-smallest continent in terms of area, with an area of 10,600,000 km² (4,140,625 square miles), making it larger than Australia only. ...
Far East is an inexact term often used for East Asia and Southeast Asia combined, sometimes including also the easternmost territories of Russia, i. ...
Active or passive managment Investing in real assets is generally excepted as one of the best ways to acheive real investment growth over time.
However, the methods used to make your investment are manifold and often split people into opposing camps. Assuming that it is accepted that a number of different holdings are selected to spread risk then the logical progression is to ask by what method you select your holdings? At this point when considering bonds or shares any other easily definable market then two camps are formed those who believe that it is imposible to know which stocks will do well and those who beleive it is possible to predict which stocks will perform better than others. If you beive it is possilbe to select the stock which will do well you will actively manage your investement buying and selling upon whichever principles you decide. If you believe it is not possible to predict performance you will purchase your stock upon whichever criteria you feel is appropriate and hold those investments accordingly. In finance, a bond is a debt security, that is the issuer owes the holders a debt and is obliged to pay the principal and interest (the coupon), together with other obligations under the term of the issue, such as the obligation to give certain information. ...
Look up share on Wiktionary, the free dictionary. ...
An example of active management success
- In 1998 Richard Branson (head of Virgin) publically bet Nicola Horlick (head of SG Asset Managment) that her SG UK Growth fund would not beat the FTSE 100 index, nor his Virgin Index Tracker fund over three years, nor acheive it's stated aim to beat the index by 2% each year. He lost and paid £6,000 to charity.
Sir Richard Branson during the announcement of the Virgin Express airline which would compete with Ryanair and EasyJet. ...
The Virgin Group is the group of companies using the Virgin brand of British celebrity business tycoon Sir Richard Branson. ...
The Financial Times Stock Exchange Index of 100 Leading Shares, or FTSE 100 Index (pronounced footsie), is a share index of the 100 largest companies listed on the London Stock Exchange. ...
In its most general sense, virginity is characterized by a state of unimpacted purity, usually stemming from a lack of experience (for example, newcomers to the The Rocky Horror Picture Show are traditionally referred to as virgins). ...
Alpha, Beta, R-squared and standard deviation
Types of risk
Internationally recognised collective investments Exchange-traded funds (or ETFs) are a type of mutual fund. ...
US Specific Collective Investments (Click here for US SEC description of investment company types). A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities. ...
A closed-end fund is a collective investment scheme with a constant number of shares. ...
A unit trust or unit investment trust (UIT) enables investors to pool their money and place it under professional investment management. ...
UK Specific Collective Investments - Investment Trusts - Introduced 1868. Closed-ended with corporate structure.
- Unit Trusts - Introduced 1931. Open-ended with a trust structure.
- Unitised Insurance Funds - Introduced 1970's. Open-ended with a life policy structure.
- OEICs or ICVCs - Introduced 1997. Open-ended with a corporate structure.
Investment Trusts are companies that invest in the shares of other companies. ...
Note: the Unit Investment Trust (UIT) is a separate US fund type. ...
Canadian Collective Investments An income trust is an investment trust that holds income-producing assets. ...
European Collective Investments French - Investment funds
- FCP (Fonds commun de placement) (unincorporated investment fund)
- SICAF (Société d'investissement à capital fixe) (incorporated investment fund)
- SICAV (Société d'investissement à capital variable) (incorporated investment fund)
FCP stands for Fibre Channel protocol ...
The Seoul International Cartoon and Animation Festival (SICAF), which is celebrating its 9th edition this year, will be held at Pacific Hall/COEX, MegaBox/COEX, and the Seoul Plaza in front of City Hall from 11-16 August for a period of six days. ...
Australian Collective Investments - Listed investment company or LIC. Closed-ended collective investment either corporate or trust based. Available since 1928.
- Unit trusts open-ended trust based investments often called Managed funds or unlisted managed funds.
Note: the Unit Investment Trust (UIT) is a separate US fund type. ...
See also A closed-end fund is a collective investment scheme with a constant number of shares. ...
Exchange-traded funds (or ETFs) are a type of mutual fund. ...
An open-end fund is a mutual fund which can issue and redeem shares at any time. ...
Financial intermediaries are institutions (such as banks, insurance companies, mutual funds, pension funds, and finance companies. ...
Financial planners are professionals who perform a variety of services for their clients. ...
Independent Financial Advisers or IFAs in the United Kingdom offer unbiased advice to their clients and recommend suitable financial products from the whole market. ...
Citizen of developed nations subject to high domestic taxation may choose to invest their money in tax havens referred to as offshore juristictions. ...
A stock broker or stockbroker or stock brokerage is someone or a firm who performs transactions in financial instruments on a stock market as an agent of his/her/its clients who are unable or unwilling to trade for themselves. ...
External links - Answers U.S. SEC Consumer Information
- Investments UK FSA Consumer Information
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