- On the other hand, investments have some of the same characteristics as savings. It is an action of preserving money for profit motives. Generally investments make it possible for you to use your money to make more money. Instead of spending your extra money, you can invest this money, either regularly or as and when you have money to invest.
Savings is a portion of income that is not spent on consumption. It is kept to enable you to plan for your future and that of your family. You may wish to own a home and by saving for a deposit to buy the home you can then apply for a home loan and if the application is successful, you can prepare to buy a home. You may also want to save enough money to pay for your children’s school, etc.
On the other hand, investments have some of the same characteristics as savings. It is an action of preserving money for profit motives. Generally investments make it possible for you to use your money to make more money. Instead of spending your extra money, you can invest this money, either regularly or as and when you have money to invest.
In order to make savings and investments possible and part of your lifestyle, it is important that you budget for this. You should list the amounts for your savings, your investments, and your expenses out of your income and this will help you to make sure that you put money away regularly to provide for your future. One way in which you can save or invest money for your future is to put money in a Collective Investment Schemes.
And so, when contemplating to invest their savings into the securities which are listed in the stock market, private individuals should have the option — to either invest directly or to invest indirectly via the collective investment schemes, also known as mutual funds or unit trusts. For some countries such as India or Sri Lanka, private individuals (also known as retail investors) are highly encouraged to use the services of fund/investment managers who runs and manages these collective investment schemes, instead of direct investment mainly because of the limited skills on investment matters.
What is a collective investment scheme (CIS)?
CIS (also known as unit trusts or participatory interests) are investments in which many different investors put their money together or pool their money into a portfolio, and then, as indicated above, this pooled money is managed by professional investment managers. These professional investment managers invest this pooled money in different asset classes. These assets include a wide range of shares of companies listed on an exchange: shares, bonds, property and money market instruments.
The total value of the pool of invested money is split into equal portions called participatory interests or units. When you invest your money in a CIS portfolio, you buy a portion of the participatory interests in the total CIS portfolio. The assets of a CIS portfolio are held by the trustees.
The unit price or the net asset value (NAV) of the CIS depends on the market value of the underlying investments in which the pool of money is invested. This unit price rises and falls (fluctuates) according to the value of the underlying investments based on daily calculations.
What are some of the advantages of CIS over direct investment?
they hire professional investment managers, which may potentially be able to offer better returns and more adequate risk management;
they provide benefit from economies of scale i.e., lower transaction costs; and
they increase the asset diversification to reduce some un-systemic risk.
What are some of the benefits of investing in CIS in listed securities:
They are affordable and easy - these collective investments are affordable as an investor can invest small amounts of money. This makes it possible for more people to easily invest in underlying assets that they normally would not be able to afford.
Diversification of risk - as collective investments may be invested in a range of underlying assets, it means that your eggs are not all in one basket. The risk associated with your investment is therefore spread amongst the different underlying assets. If any of these assets perform poorly, your total investment will not necessarily perform poorly as there are other assets that may have done very well. The more diversified your capital, the lower the capital risk. This investment principle is often referred to as spreading risk.
Good returns — the longer you leave your money invested, the greater the opportunity for your investment to grow. An investment in a CIS in securities can be repurchased at any time, however, it is advisable that you invest the money for at least three to five years. The reason for this is that the value of the units of a CIS in securities can go up or down. If invested for a longer period of time, one can expect to see the benefit of the long-term growth.
Professional investment management — an investment manager manages your investments for a fee; one must confirm if such an investment manager is licensed with the regulator as a financial services provider.
Your money is accessible — CIS in securities are easy to sell which means that you can sell all or part of your investment at any time. However, it is recommended that you invest your money for at least three to five years so that your investment can grow.
Different investment options — CIS in securities offer flexible investment options: (i) lump sum investments – these can be made at any time once you have opened your collective investment account; (ii) debit order investments – you can make regular payments, e.g. monthly, into your account; and (iii) switching – you can switch between different portfolios.
Reduced dealing costs - If one investor had to buy a large number of direct investments, the amount this person would be able to invest in each holding is likely to be small. Transactions costs are normally based on the number and size of each transaction, therefore the overall transaction costs would take a large chunk out of the capital (affecting future profits).
What informs the choice of where to invest?
It is important that, before you select a portfolio in which to invest, you first understand what you are investing in, and that you carefully consider the amount you commit to invest. A registered financial advisor should assess the amount of risk that you are prepared to take and advise you accordingly. Factors such as your age, health, income, alternative liquid assets, financial knowledge, appetite to risk, whether or not you have dependents and what your investment goals are will all influence the choice of investment.
What are the major types of CIS in securities?
There are two types of CIS in securities:
Open-ended CIS: this is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund’s NAV. Each time money is invested, new units are created to match the prevailing share price and each time shares are redeemed, the assets sold to enable redemption matches the prevailing share price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets.
Closed-end CIS: this is organised as a publicly traded investment company that issues a limited number of shares (or units) for a fixed amount of capital through an initial public offering (IPO) or through private placement. If shares are issued through an IPO, they are then traded like a stock on a stock exchange. If demand for the shares is high, they may trade at a premium to NAV. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the vehicle if demand is high although this may affect the share price.
What is local experience?
We have a few registered fund managers, regulated by both the Capital Markets Regulator (or CMSA) and the pension sector regulator (or SSRA). The most visible CIS manager has been the UTT-AMIS, that manages five open-ended CIS schemes.
We also have some forms of closed-end CIS —TCCIA Investment Company and National Investment Company Limited (Nicol) are some of the examples. How do these work? Closed end funds can be via private placement or via the IPO. TCCIA Investment did via private placement while Nicol did the a combination of both private placement and IPO; it got listed in the stock exchange and later was delisted from the stock exchange because of governance issues.