Financial Wellness with Richmond Kwame Frimpong
Put simply, a collective investment scheme is a pool of funds (money) collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. In other words, your money is pooled together with that of other investors and spread over the whole range of assets within the fund. Through a professional fund manager, the investment is divided into shares and the number of shares held represent the investors’ proportionate ownership of the scheme’s overall assets, and the return those assets may generate. The prices of these shares fluctuate daily because the underlying value of the assets rise and fall – and since the total value of the scheme is divided by the number of shares issued, an individual investor’s stake will rise and/or fall to reflect same.
An Open-ended CIS issues new shares or redeem outstanding shares on a continuous basis. This means that the fund does not have a set number of shares. Instead, the scheme will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. In sum, you can buy (invest or top-up) at any time.
A close-ended CIS issues a fixed number of shares and does not stand ready to repurchase shares from their shareholders when they decide to sell them. Usually, Securities Industry Laws in an investment region requires that closed-ended funds be listed on an organized exchange in order to provide liquidity to the shareholders. These shares are traded at prices determined by the laws of supply and demand. In sum, you cannot buy (invest or top-up) after the Initial Public Offer (IPO) period.
Benefits of investing in a CIS
- a) The Investor gets the services of a Professional Fund Manager: Collective Investment Schemes are actively managed by professional Fund managers who constantly monitor the securities markets (i.e., stocks, bonds, fixed income market etc.) in the scheme’s portfolio. Because this is their primary occupation, Fund managers devote their time to selecting investments more than an individual investor. This provides the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculating financial ratios.
- b) The Investor gets the benefits of Diversification: Diversification is simply not “putting all your eggs in one basket”. Collective Investment Schemes invest in a number of different securities, and that helps reduce the risk of investing. Fund managers of CIS invest in a portfolio of dozens of different securities, giving the investors instant diversification – at least within the type of securities held by the fund. For example, a portfolio made up of shares from various companies, fixed-term and money market securities is a good example of diversification.
- c) The Investor gets liquidity and flexibility: Shares of open-end CISs can be redeemed at any time at the Net Asset Value Per Share (NAVPS). Many fund management companies administer several different schemes. (e.g., money market, fixed-income, growth, balanced and international funds) and allow the investor to switch between schemes within their ‘fund family’ at little or no charge. This can enable the investor to change the balance of his portfolio as his personal needs or market conditions change.
- d) The Investor gets Tax Advantages: Collective Investment Schemes do not pay taxes on their incomes in many jurisdictions per their securities industry laws. Again, investors in these schemes do not pay taxes on incomes received from them. These tax incentives have been designed to encourage the pooling of investors’ resources together for investments to develop the economy
- e) The Investor gets the benefits of low cost/fees: Thanks to their ‘bulk-buying’ power, collective investment schemes can be highly cost-efﬁcient. They spread ﬁxed costs, such as the charges for safekeeping of assets across all investors in the fund. So, large transactions can be carried out at a fraction of the cost an individual investor would have paid buying directly.
Caution on Investing in Collective Investment Schemes
- a) Past performance does not guarantee future performance. In other words, last year’s ‘number-one’ Scheme can easily become the next year’s below-average Scheme. So, an investors’ decision to invest in a particular collective investment scheme should not only be based on the Scheme’s past returns’ record. Inversely, past performance can help an investor assess its volatility (risk/return profile) over time.
- b) All things being equal, the more volatile a fund, the higher the investment risk. So, if you need your money to meet a financial goal in the near-term (say 91 or 182 days), you probably cannot afford the risk of investing in a CIS with a volatile history because you will not have enough time to ride out any declines in the stock market.
- c) Collective Investment Schemes and their returns are not guaranteed or insured. An investor can possibly lose money investing over a period and vice versa.
- e) CIS shares are ‘redeemable’, meaning investors can sell their shares back to the fund (or to a broker acting for the fund).
- f) CIS shares are purchased from the fund itself instead of from other investors on a secondary market, such as the Ghana Stock Exchange (in Ghana) or the Johannesburg Stock Exchange (in South Africa).
- g) The price that investors pay for mutual fund shares is the funds per share net asset value (NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as exit loads).
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