Explained by AI (and I): Collective Investment Schemes
Kenya's CMA has licensed 22 new fund managers since 2020. This has resulted in a rapid proliferation in Collective Investment Schemes (CIS's) in the period since. The most popular of these being the Money Market Fund or MMF. But what exactly is a collective investment scheme or mutual fund or unit trust?
Definition
Collective Investment Schemes (CIS), also known as mutual funds, pooled investment vehicles, or investment funds, are financial structures that pool money from multiple investors to invest in a diversified portfolio of assets such as stocks, bonds, real estate, or other securities. These CIS’s are managed by professional fund managers who make investment decisions on behalf of the investors.
How they work
Here's a breakdown of how CIS’s work and their benefits:
- Pooling resources: Investors buy shares or units in a CIS, which combines their money into a large pool. This pooled capital allows the scheme to invest in a broader range of assets than an individual investor could not typically afford on their own.
- Diversification: By investing in a variety of assets, CIS reduce the risk of significant losses. If one investment performs poorly, the impact on the overall portfolio is minimized because other investments may perform better.
- Professional management: Professional management by fund managers aims to maximize returns and manage risks more effectively than individual investors might on their own.
- Accessibility: CIS’s make it easier for small investors to access a diversified portfolio. They allow individuals to invest in a wide range of assets with relatively small amounts of money.
- Liquidity: Investors in many CIS’s can typically buy or sell their shares at the fund's net asset value (NAV) at the end of each trading day, making it easy to access their money when needed.
- Cost efficiency: Pooling resources in a CIS can lead to lower transaction costs and management fees compared to investing individually. The economies of scale achieved by managing a large pool of funds help reduce overall expenses for investors.
Some types of CIS’s you may come across are: Mutual Funds, Exchange-Traded Funds (ETFs), Unit Trusts or Closed-End Funds.
CIS’s are a great entry point for new investors and remain a staple for even seasoned investors.
