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Collective Investment Schemes

What are Collective Investment Schemes?
Collective Investment Schemes (CISs) are private financial arrangements. They pool resources of many small savers, generating a large pool. The resources are then invested in various assets like shares, bonds, property and treasury bills with the sole purpose of generating high returns while minimizing risk through diversification of investments.

Collective Investment Schemes (CISs) provide a means for mobilisation of savings and enable small investors to participate in capital markets. CISs widen the choice of investment vehicles, involve the public in the process of investing in securities through pooling resources together, which are then invested by professional managers.

Types of CISs
There are currently two types of schemes in Uganda:

1. Unit Trust Schemes
These are types of schemes where investors buy units, which represent the various holdings of the scheme.

  • One’s investment is represented by the units they hold in the scheme. The Unit Trust Scheme is established by a trust deed between a fund manager (which must be a body corporate) and a trustee (bank or insurance company). The trust deed spells out the duties and obligations of the fund manager and trustee. In a unit trust, investments are made on behalf of the unit holders by the unit trust manager but the assets of the scheme are held by the trustee or custodian.
  • The manager purchases the investor’s unit at the ruling price and the investor’s money is desposited onto his/her bank account within two days.

The main duties of a fund manager include:

  • Marketing the fund
  • Appointing a fund manager to manage investors’ funds
  • Provide liquidity to the unit holders who wish to sell their investments.

The functions of the trustee include the following:

  • Overseeing of the fund
  • Safeguarding the assets of the scheme
  • Ensuring that the fund manager manages the fund according to the trust deed

Why invest in unit trusts?

  • It gives you an opportunity to liquidate investments by selling your units back to the manager
  • Minimises risk by diversifying investments
  • A chance to reap more benefits because of the expertise of proffessional staff
  • Investors can access high-priced markets because of the pooled resources which create a larger fund

Who Manages CISs
The investments are selected and managed by professionals, known as fund managers in the case of Unit Trusts. Investors are therefore not involved in the day to day decisions concerning how their money is invested.

The investors pay a fixed percentage of the return to the fund manager . The scheme therefore makes money by managing other people?s money. Investment income and capital gains generated by the scheme are passed on to the investors and are shared in proportion to the investors? holding in the CIS.

Advantages of Collective Investment Schemes
The attraction of CISs in developed countries has been attributed to five main factors, risk, access to securities investments, cost, professional management and regulation.

  • Diversification of Risk- Investors can secure a much wider diversification of risk, because these funds usually invest in different investments. Studies show that the greater the diversification of a portfolio, the lower the risk in relation to the return. Those who invest in CISs are therefore seeking to lower risks in relation to their returns.
  • Access to Securities Investments – By investing a small sum (either in a lump sum or on a regular saving basis), an investor through the CIS can achieve a personal portfolio spread over several securities.
  • Lower Transaction Costs- By investing in a CIS, investors incur lower costs than if they were to buy and sell a portfolio of individual securities directly. This is because transaction costs are generally related to the size of the transaction, and investors benefit from the fund manager?s ability to deal in larger quantities of shares at lower average dealing costs. Fund managers can also reallocate portfolios more efficiently than can individual investors.
  • Professional Management- Due to the complexity of analyzing information regarding individual securities, most individuals do not have the professional skills to manage their own investments. CISs provide full time professional management in a direct and simple form and this is especially important where market information is not widely available.
  • Investor protection- CISs have succeeded in developed markets due to an effective legal and regulatory framework. People need to have confidence that their money is protected from fraud, theft and other abuses. The CIS Act and regulations made under it provide the desired regulatory framework that will protect investors.

Terms Commonly used in Collective Investment Schemes
Investment advisor: A person who provides advice in relation to the company giving the advantages of investment opportunities or information that assists a potential investor to make an investment decision.

Fund Manager
Is a person licensed by the Authority to undertake, on behalf of the client the management of a portfolio of funds .

Unit Trusts
A unit trust is an investment scheme that pools savings of the public who share the same financial interests. The pooled savings are then invested in securities such as shares, bonds and other authorised securities.

Trustee
Individual or company who holds the assets of a collective investment fund on behalf of its investors, who are the beneficiaries of the trust.

Portfolio
Funds managed on behalf of clients at the discretion of a fund manager

Trust Deed
Agreement between a Fund Manager and an Authorised Corporate Director (ACD)

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