Collective Investment Funds

A Collective Investment Fund (CIF) is a trust that consolidates assets from various clients and is administered by a bank or trust company.
Collective Investment Funds
3 min
04-June-2024

In India, a collective investment fund (CIF) is a pooled investment instrument that combines the financial assets of multiple investors to create a diversified portfolio. Collective investment funds are managed by the fund managers. The most common CIFs are mutual funds. They help you invest in a wide range of securities, such as stocks, money market instruments, and other financial securities. While CIFs resemble mutual funds, accessing or withdrawing funds from a CIF typically involves more complexity compared to buying or selling shares in a mutual fund.

SEBI (Securities and Exchange Board of India), the securities watchdog in India, regulates these funds based on the SEBI (Collective Investment Schemes) Regulations, 1999.

What are Collective Investment Funds (CIFs)?

According to the SEBI Act’s subsection (2) of section 11AA, you can call a collective investment fund in India a collective investment scheme if it satisfies the following four conditions:

  1. An AMC (Asset Management Company) collects funds from multiple investors.
  2. The pooled fund is used to generate profit, income, or property.
  3. A qualified and experienced fund manager manages the pooled fund on behalf of the investors.
  4. Investors do not have day-to-day control or say over the operation and management of the scheme.

It is important to note

  • An AMC is categorised as a Collective Investment Management Company (CIMC).
    • CIMC is incorporated under the Companies Act of 1956.
  • An existing collective investment scheme can raise funds from multiple investors or launch new mutual fund schemes only if a certificate of registration has been granted by SEBI.

How does a collective investment fund work ?

Collective investment funds operate as a pooling mechanism where multiple investors contribute their funds to invest in a diversified portfolio of securities. Under the regulatory framework of the Securities and Exchange Board of India, CIFs are managed by professional fund managers who make informed investment decisions based on the fund's objectives and risk tolerance. The pooled funds are invested in a variety of securities, such as stocks, bonds, and other financial instruments, to minimise risk and maximise returns.

The fund manager continuously monitors the portfolio and makes adjustments as needed to ensure it remains aligned with the fund's objectives. Investors can redeem their units in the CIF at the prevailing net asset value (NAV) or at a predetermined frequency, such as quarterly or annually. The benefits of CIFs include diversification, professional management, risk management, and convenience, making them a popular investment vehicle for investors seeking to achieve their financial goals.

Examples of collective investment funds

The five most common examples of collective investment funds are:

  1. Mutual funds
  2. REITs (Real Estate Investment Trusts)
  3. ETFs (Exchange Traded Funds)
  4. PMS (Portfolio Management Services)
  5. SGB (Sovereign Gold Bonds)

The popularity of CIFs, such as mutual funds, has increased significantly in India, especially in recent years. According to AMFI (Association of Mutual Funds in India), the AUM of the mutual fund industry increased fivefold in less than 10 years. It jumped from Rs. 10 lakh crore in May 2014 to Rs. 50 lakh crore in December 2023.

How to invest in a collective investment fund?

To invest in a collective investment fund, follow these steps:

  1. Understand the basics: A CIF is a tax-exempt, pooled investment fund primarily available through employer-sponsored retirement plans. There are two types: A1 funds for investment or reinvestment and A2 funds for retirement, profit sharing, stock bonuses, or other tax-exempt entities.
  2. Choose the right fund: Select a fund that aligns with your investment goals and risk tolerance. Understand the fees and charges associated with the fund.
  3. Open an account: CIFs are typically offered by banks or trust companies. Fill out the application form and provide the necessary documentation. Deposit the required amount to start investing.
  4. Monitor and adjust: Receive regular reports on the fund's performance and holdings. Periodically review and rebalance your portfolio to maintain your desired risk profile and investment objectives.
  5. Seek professional advice: Consult a financial advisor to help you select the right fund and create a personalised investment plan.

By following these steps, you can effectively invest in a collective investment fund and achieve your financial goals.

History of collective investment trusts

Collective Investment Trusts (CITs), also known as collective investment funds, have a rich history in the country's financial scenario. These investment vehicles have evolved significantly over the years, playing a crucial role in the growth and development of the Indian investment management industry.

  • 1963: The concept of CITs was first introduced in India with the establishment of the Unit Trust of India (UTI), the country's first mutual fund.
  • 1964: UTI launched its first scheme, the Unit Scheme 1964, which was a collective investment trust that pooled funds from individual and institutional investors.
  • 1987: The Securities and Exchange Board of India (SEBI) was established, which led to the regulation and growth of the mutual fund industry in India
  • 1990s: The Indian financial markets were liberalised, leading to the entry of private sector mutual funds and the expansion of the CIT industry.
  • 2000s: CITs in India diversified their investment strategies, offering a wider range of products to cater to the evolving needs of investors.
  • 2012: SEBI introduced new regulations for the mutual fund industry, including CITs, aimed at increasing transparency and investor protection.

How CIFs differ from mutual funds?

  • Eligibility: CIFs are limited to institutional investors and employer-sponsored retirement plans, whereas mutual funds are open to retail investors.
  • Fees: CIFs have different fee structures based on services and assets managed, whereas mutual funds have set asset-based fees.
  • Investment strategy: CIFs focus on specific investment strategies and asset classes, whereas mutual funds offer a wide range of investment strategies and asset classes.
  • Transparency: CIFs provide less transparency compared to mutual funds due to their institutional nature.
  • Redemption fees: CIFs generally do not have redemption fees, whereas mutual funds may have redemption fees.
  • Minimum investments: CIFs often require significant minimum investments, whereas mutual funds typically have lower minimum investment requirements.
  • Investment risk: CIFs carry investment risk, but participants bear the risk entirely, whereas mutual funds also carry investment risk, including possible loss of principal.
  • Taxation: CIFs are tax-exempt, whereas mutual funds are subject to taxes.
  • Participation: CIFs are restricted to only customers covered by the exemption, whereas mutual funds are open to all investors.
  • Management: CIFs are managed by banks or trust companies, whereas mutual funds are managed by professional investment managers.
  • Disclosure: CIFs provide less detailed disclosure compared to mutual funds due to their institutional nature.

Summary

If you want your investments to outperform the indices and fixed deposit returns, collective investment funds can be the right choice. As CIFs are affordable and have a low entry barrier, anyone can start investing with just Rs. 500 or Rs. 1000. You can also enjoy diversification, liquidity, and transparency with mutual funds.

If you wish to start your investment journey, you can compare 1000+ mutual funds listed on the Bajaj Finserv Mutual Fund Platform. You may check the expected return on the SIP calculator or lumpsum calculator before investing.

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Frequently asked questions

What is meant by collective investment?

A collective investment refers to a special investment arrangement where a SEBI-registered wealth management company (also called AMC) pools money from different investors. A fund manager invests or actively manages the money to provide investors with a return that is higher than the fixed-income financial products.

What is an example of a collective investment fund?

A mutual fund is a popular example of a collective investment fund.

How do collective funds work?

Collective funds start with the pooling of funds from numerous investors. Once the pooling is underway, a fund manager invests that fund on your behalf. He/she diversifies to provide investors with their expected return, in accordance with their risk profiles. You can expect a certain return, based on historical price and return charts. the fund manager actively monitors the investments of mutual funds. If he witnesses any risky investment, it is replaced with a better prospective investment. That is how collective funds work.

What is the difference between a collective investment scheme and a mutual fund?

The biggest difference between a collective investment scheme and a mutual fund is that the former is available to institutional investors and the latter to retail investors. 

What are the three types of collective investment schemes?

The three kinds of collective investment schemes are equity funds, bond funds, and money market funds.

Who are collective funds offered by?

The collective investment funds are offered by trust companies and banks.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.