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Understanding collective investment scheme

By BABAJIDE KOMOLAFE

Investment is generally challenging and risky. This is more so for beginners with little or no knowledge and expertise when it comes to what to invest in and how to invest. This challenge has kept a lot of people from investing. It has also caused others huge loses.

In fact a number of our readers have expressed concern in this regard. “I want to invest but I don’t know how to go about it”, some readers asked.   One of the answers to this challenge is what is called “Collective Investment Scheme”, or “Mutual Funds”.

Imagine some people contributing money into a pool for investment purposes, and the money is given to somebody or a company which has expertise and professional knowledge (called Fund Manager) about investment, to invest for them.

The fund manager manages and invests the money in investible instruments (shares, bonds, treasury bills etc.) to make profit for the owners of the money. At the end of the year, the fund manager is paid out of the profit and the remaining (or part) is distributed among the contributors, as dividend or profit.

That is essentially what a collective investment scheme is all about, and it is recognised by the law. The Investments and Securities Act (ISA) No. 29 of 2007, which is the law that governs investment in the nation’s capital market (Section 153) defines the meaning, scope and mode of operations for such schemes. Consequently, collective investment schemes are licensed and regulated by the Securities and Exchange Commission (SEC), which is the regulator of all capital market activities in the country.

The above is very important, because there have been and there are, all manner of collective investment scheme out there in one form or the other. A number of them are not licensed by SEC. Some of them are fake and established for fraudulent purposes, either to defraud contributors, or to engage in illegal activities. But there are genuine ones, duly registered and licensed by SEC. So, before you patronise any collective investment scheme, visit the website of SEC to ascertain if such scheme is licensed by SEC.

Investing through a collective investment scheme solves some problem, and minimises some of the risks. First, the challenge of knowing what to invest in is eliminated. The fund manager assumes this responsibly, and because the company has knowledge and expertise in this regard, you can be sure, to a large extent that, it would make good investment choices, on behalf of contributors.

Secondly, as an individual investor, there is a limit to what the money available to you can buy. What you have may not be able to invest in more than one or two assets, and in very limited quantities. But in the case of a collective scheme, your money is part of a pool of funds, large enough to invest in different instruments across various sectors.

If any of the instruments does not perform well, others would. Consequently, each contributor has opportunity to benefit from returns from many instruments, across different sectors, and suffer minimal loss, if any of them does not perform well.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.