Collective Investment Scheme (CIS) is a scheme that invites members of the public to invest money or other assets in a portfolio and share the risk and benefit of investment in proportion to their participatory interest. It is essentially a joint investment that allows investors to pool funds to invest in several securities, boost returns, and minimize risk.
Types of Collective Investment Scheme (CIS)
Under Nigerian law, there are five recognized types of CIS. They include:
- Unit Trust Scheme (most common)
- Venture Capital Funds
- Real Estate Investment Schemes
- Specialized Funds.
- Mutual Fund
1. Unit Trust
A Unit Trust Scheme is a type of investment fund into which individual investors known as subscribers or unit holders contribute small sums of money to form a pool and enable professional fund managers to invest in money market instruments, shares, and stocks on their behalf.
Unitholders that invest in unit trust schemes benefit from low-cost, competent fund management, and diversity.
In a unit trust system, the total money is divided into units with precisely equal values, such as. If one-unit costs N1, then everyone investing N100 will receive 100 units.
There are two types of funds in Unit Trust
- Open-Ended Fund
This is a Fund that continuously creates issues and redeems units after the initial public offering. The Fund is usually traded in the primary market and the price is based on the Net Asset Value (NAV), which is the total asset of the fund minus liabilities as at the date of purchase or redemption. Some mutual funds, hedge funds, and exchange-traded funds (ETFs) are types of open-end funds.
- Closed-Ended Fund
In a Closed–Ended Fund, there is no additional issue of new units or redemption of units. The Fund is usually listed and traded on the Stock Exchange and its price will be determined by the market forces of supply and demand. A unitholder who wants to redeem his unit will therefore have to go through his Stockbroker.
2. Venture Capital
Venture Capital focuses on financing start-ups and young businesses in their early stages of expansion. It is described as a profit-seeking initiative by an entrepreneur, whose main goal is to provide funding to young, expanding businesses with the hope of reaping long-term profits.
The following elements must be present for there to be a venture capital fund.
- Those who are willing to take on risk and wait for long-term returns rather than quick riches (venture capitalists).
- A venture capital company is required to gather funds from the risk-takers and provide them with shares in exchange for the money with the promise of a significant return in the future.
- There must be a successful business initiative into which the venture capital company could put some of its equity, regardless of how new or young it is.
- The need for finance for expansion must be expressed by an entrepreneur with a successful firm.
3. Real Estate Investment Trust Scheme (REITS)
REITS is a Collective Investment Scheme that directly invests (acquires, holds, and manages) in income-generating real estate (and real estate-related) assets using pooled funds from subscriptions of its participant investors/unit holders.
4. Specialized fund
Specialized funds focus on specific industries, including commodities, regions, or other segment of the market. These funds include sector funds, balanced funds, asset allocation, and target date funds. Using these funds, investors can gain access to banking, real estate, chemicals, energy, or telecommunications. Sector funds, also known as specialty funds, are mutual funds and ETFs (exchange-traded funds) that concentrate on a specific industry or market. These funds take a targeted approach and invest only in companies in certain segments of the economy.
5. Mutual Fund
A mutual fund is a type of investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities that align with the fund’s investment objective. So, a mutual fund is an investment scheme but not all investment schemes are mutual funds.
Who Can Invest in Collective Investment Scheme?
- Resident Individual
- Companies/Partnership Firms
- Trusts/Charitable Institutions
- Banks/Financial Institutions
- Non-Banking Finance Companies
Parties in Investment Scheme
For every Collective Investment Scheme, there is a relationship between key parties, which promotes a strong level of accountability and clarity.
- The Unit Holder/Subscriber
- The Fund Manager
- The Trustee
- The Custodian
- The Registrar
Types of Investment Scheme Companies in Nigeria
- Quantum Zenith – Mutual Funds (Open-ended funds)
- Sterling Asset Management& Trustees Limited
- Asset Resource Management (ARM)
- FBN Quest – Mutual Funds (Unit Trust)
- Cowry Asset Management Limited
- Citigroup Global Markets Inc.
- Stanbic IBTC Asset Management
- FCMB asset management
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