Collective Investments
A collective investment is a fund where your money is pooled with that of other investors. This creates a substantial amount of capital managed by a professional fund manager, who then constructs a diversified portfolio of assets. This method provides you with access to a broad range of investments that would be difficult and expensive for an individual investor to hold directly.
Common types of collective investment schemes in the UK include unit trusts, Open-Ended Investment Companies (OEICs), and investment trusts (or investment companies).
Key benefits of collective investments
- Diversification: By pooling money, a fund can invest in numerous companies, sectors, geographically diverse regions, and asset classes. This broadens risk spread, lessening the effect of poor performance from any single holding on the overall investment.
- Professional management: Your investment benefits from the expertise of a full-time fund manager who researches, selects, and monitors the assets within the portfolio.
- Economies of scale: Since funds buy and sell in large volumes, transaction costs are often lower than those faced by individual investors.
- Simplicity: Buying and selling units within a single fund is much easier than managing a large portfolio of individual stocks and shares.
Types of assets held
Collectives can invest in a broad spectrum of assets, including:
- Equities: Shares in companies.
- Fixed interest (bonds): These include UK government bonds (gilts) and corporate bonds issued by companies. While traditionally seen as lower risk than equities, their prices can fluctuate, especially with changes in interest rates (prices tend to fall when rates rise). There is also a risk that the issuer could default on interest payments or fail to repay the principal at maturity.
- Property: Direct investment in commercial buildings like offices and warehouses.
- Cash: To meet daily expenses and manage investor withdrawals.
Structure and liquidity
Collectives can be either ‘open-ended’ (like unit trusts and OEICs) or ‘closed-ended’ (like investment companies). One key difference is liquidity. With open-ended funds, the manager issues new units for investors buying in and cancels units for those selling.
However, if a fund holds illiquid assets such as commercial property, managers might have to suspend trading or delay withdrawals during times of market stress. This is to prevent selling assets at a low price to satisfy redemption requests, which could damage the remaining investors.
Costs and tax
All funds have charges, which may include an ongoing fund charge (OFC), transaction costs, and platform fees. It is also common for fund managers to hold a small amount of cash within the fund for liquidity purposes, so not all your money is invested at all times.
For tax efficiency, collective investments can be held within wrappers such as an Individual Savings Account (ISA) or a pension.
THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
Offshore Collectives
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