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)?
Collective Investment Funds (CIFs) are pooled investment vehicles that collect money from multiple investors and invest it in a diversified portfolio of assets such as equities, bonds or money market instruments. These funds are managed by professional fund managers who make investment decisions on behalf of investors based on predefined objectives. By pooling resources, CIFs allow investors to access diversified portfolios and professional management that may be difficult to achieve individually. Mutual funds, exchange-traded funds and unit trusts are common examples of collective investment funds.
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:
- Mutual funds
- REITs (Real Estate Investment Trusts)
- ETFs (Exchange Traded Funds)
- PMS (Portfolio Management Services)
- 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.
Formula and calculation
The value of a collective investment fund is determined using its net asset value (NAV) per unit or share. NAV represents the fund’s total asset value after deducting liabilities, divided by the number of outstanding units or shares. This value is calculated at least once on every business day, typically after market hours.
Formula for NAV per unit
NAV per unit = (Total assets − Total liabilities) ÷ Number of outstanding units
Explanation of components
- Total assets: The current market value of all investments held by the fund, including securities, cash and other receivables.
- Total liabilities: All expenses and obligations of the fund, such as management fees, administrative costs and other payables.
- Number of outstanding units: The total units or shares held by investors at that point in time.
The NAV indicates the price at which investors can buy or redeem units of the fund for that day.
Interpreting a collective investment fund
Evaluating a collective investment fund requires looking beyond its name and understanding its investment objective, asset allocation and overall structure. One of the key indicators to track is the net asset value (NAV) per unit, which represents the fund’s value on a per-unit basis. A rising NAV usually reflects strong performance of the underlying assets, while a declining NAV indicates weaker performance. However, the NAV alone does not determine whether a fund is good or bad; its trend over time provides better insight into performance.
Investors should also review the fund’s expense ratio, which shows the annual cost of managing the fund as a percentage of its assets. Lower expenses help investors retain a larger portion of their returns. Additionally, the type of assets held, such as equities, bonds or alternative investments, plays a major role in shaping the fund’s risk profile and return potential.
How to invest in a collective investment fund?
To invest in a collective investment fund, follow these steps:
- 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.
- 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.
- 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.
- 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.
- 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.
Advantages and Disadvantages of Collective Investment Funds (CIFs)
Pros |
Cons |
Provide access to professionally managed and diversified portfolios |
Management and administrative fees can reduce overall returns |
Allow investors to participate in markets with relatively small investments |
Returns are subject to market risks and volatility |
Diversification helps spread risk across multiple securities |
Limited control over individual investment decisions |
Easier portfolio management compared to direct investing |
Performance depends heavily on the fund manager’s strategy |
Suitable for investors seeking long-term, structured investing |
NAV fluctuations can affect short-term portfolio value |
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Limitations and criticisms of collective investment funds
Despite their benefits, collective investment funds also have certain limitations that investors should consider.
Fees and expenses: Although collective investment funds can benefit from economies of scale, they still charge fees such as management fees, administrative expenses and, in some cases, performance-based fees. These costs can reduce overall returns over time, making fee transparency an important factor for investors.
Lack of direct control: Investors do not have control over individual security selection, as all investment decisions are made by the fund manager. This may not suit investors who prefer to actively manage their own portfolios.
Regulatory differences and transparency: Some types of collective investment funds, such as collective investment trusts, may be subject to different regulatory and disclosure standards compared to mutual funds. Lower disclosure requirements can limit transparency around holdings and performance, making comparisons across funds more difficult.
Liquidity concerns: Depending on the fund’s structure, especially in specialised or less regulated formats, liquidity may be limited during periods of market stress. This can make it harder for investors to redeem their investments quickly when needed.
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.
