A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to reduce the risk involved with investing, and to benefit from the talents and resources of professional fund managers.
Collective investment schemes may be unit trusts, open-ended investment companies (OEICs), investment trusts or pension funds.
The manager of a collective fund usually invests in shares, bonds, property or other assets and combines contributions from many investors. The investors are issued with units in the scheme, representing their share of the total assets – this is why collective schemes are often referred to as “unitised” investments.
The obligation to obtain a licence before commencing business has been extended to certain persons who carry on or are involved in the management of collective investment schemes.
General requirements
These persons include:
- Persons who operate, manage or market units in a collective investment scheme;
- Directors of companies that operate, manage or market units in a collective investment scheme; and
- Trustees of trusts that operate, manage or market units in a collective investment scheme.
- In addition, any person who is carrying on the business of a portfolio manager must have a licence.
- The requirement to obtain a licence also applies to promoters, sponsors and administrators of collective investment schemes and to any person who carries on the business of providing trustee services in relation to such schemes.
What are the different types of CIS?
There are two broad categories of CIS:
- Investment trusts, which are traded on a stock exchange; and
- Unit trusts/open ended investment companies (OEICs), both of which involve buying units from a fund manager. The units are bought and sold at their current market value rather than at their original purchase price.
There are two main types of collective investment:
- open-ended funds (OEICs) – typically invest in shares or bonds but can also invest in other assets such as property or commodities
- closed-ended funds (unit trusts and investment trusts) – typically invest in shares or bonds but can also invest in other assets such as property or commodities
The main benefits of collective investment schemes are:
- Diversification – Because you invest in a wide range of assets and different types of investment, your money is spread across different types of asset class. This means that if some assets decrease in value (sometimes called going down in value), it doesn’t reduce your overall return too much.
- Expertise – Fund managers and analysts research and choose holdings for a scheme’s portfolio. So you don’t have to routinely check the performance of your investments.
- Cost-effective – You can spread your costs over lots of investments when you invest through a collective investment scheme, rather than paying more to buy and sell individual stocks and shares yourself.
To register the fund with SEBI, the following documents are required:
- Application for registration of a CIS and fill online in Form A.
- Memorandum and Articles of Association – In case of a newly incorporated entity, the certified copy of the Memorandum and Articles of Association should be filed with SEBI. For an existing entity, a copy of the Memorandum and Articles of Association as amended shall be filed.
- Trust Deed / Bye-laws/ Rules & Regulations – The Trust Deed/ Bye-laws/ Rules & Regulations outlining the rights and obligations of both parties
- Certificate from Chartered Accountant- The certificate confirming that all assets are held in a trust account at all times, including any income/capital gains distributed to unit holders or reinvested into new units shall be obtained from a Chartered Accountant.
- Details regarding Scheme – The details regarding scheme such as investment objective, tenor, amount to be raised, exit option etc. shall be furnished in Form C along with the information memorandum containing all disclosures as per SEBI guidelines.
