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There are different ways in which people can invest their hard-earned money. Collective investment schemes offer a means for ordinary people to invest on the stock exchange. In this way, they can potentially get good returns on their investment and beat inflation.
A collective investment scheme (“CIS”) can be described as an investment product that allows many different investors to pool their money into a portfolio. Unit trusts were the first collective investment scheme to be offered to investors in South Africa.
It is still the most popular and widely available form of CIS in the country. The word “unit’ refers to the portion of the CIS portfolio that is shared by the investor. Each investor has a proportional stake in the CIS portfolio based on how much was contributed. Collective investment schemes are suitable for investors with little funds and who may not have the time, money or expertise to make the investments themselves. A CIS therefore enables smaller investors to gain exposure to the financial markets, which they would otherwise be precluded from accessing in their individual capacity.
A collective investment scheme consists of different portfolios which are generally made up of different asset classes, namely money markets, bonds, equities and property. A CIS can therefore be complex in nature, given the fact that there are many types of collective investment schemes. This might be overwhelming to the investor who lacks the necessary knowledge to manage his or her investment portfolio.
The assets of a collective investment scheme are managed by a registered CIS Manager. CIS Managers need to be registered with the Financial Services Board (FSB) in terms of the Collective Investment Schemes Control Act (Act 45 of 2002). Each CIS must be approved by and registered with the Registrar of Collective Investment Schemes at the FSB and comply with the Collective Investment Schemes Control Act (“CISCA”) (Act 45 of 2002). It is the duty of the CIS Manager to appoint an auditor, who is registered under the Public Accountants’ and Auditors’ Act of 1951, to audit the business of the CIS.
They allow ordinary people to invest in shares that would normally be out of their financial reach had their monies not been pooled with that of other investors;
A CIS reduces the investment risk through diversification. It enables individuals to invest in a broad range of securities. This diversification provides protection against isolated volatility in a particular sector or asset class;
They offer a means of beating inflation as returns can be higher than the inflation rate;
A CIS is a flexible form of investment as you can either invest a lump sum or make a regular monthly investment;
A CIS offers liquidity. This means that an investor may choose to cash in a portion of the CIS or all of it at any given time as funds are always accessible. This is not always the case with long-term insurance;
You can monitor the performance of your CIS portfolio as it appears daily in the business reports of newspapers;
Professionals in the field of collective investment schemes invest your money on your behalf;
Pooling money with that of others gives the advantage of buying in bulk, making dealing costs reasonable; and
You can choose a CIS that meets your needs.
CIS’s are seen as medium to long-term investments. Investors therefore should not expect to make a profit in the short-term;
All investments in securities, including CIS’s, run the risk that the markets may collapse and that investors may lose money;
A CIS that leans heavily towards one sector may be negatively affected by adverse economic changes in that sector;
CIS charges have been deregulated and costs may differ from one CIS Manager to the other;
Cost for giving advice by financial advisors can be built into the fund and can diminish the returns, especially if charged as an ongoing percentage of the fund;
CIS are becoming very complicated and therefore require the investor to take great care in ensuring that the scheme meets their specific needs and risk profiles.
There are basically five types of collective investment schemes from which an investor can choose, namely:
CIS in securities – the portfolio consists mainly of securities and includes local funds registered with the FSB. Most collective investment schemes fall in this category.
CIS in properties – the portfolio consists mostly of property shares or direct property.
CIS in participatory bonds – the scheme consists mostly of participatory bonds.
Declared CIS – this is a scheme declared by the Minister of Finance as a CIS.
Foreign CIS – these are foreign schemes which solicit investments from South Africans. In terms of the CISCA, a foreign CIS must apply to the Registrar of CIS to be approved and registered.
Money markets – Investments that provide monthly income through interest in the short-term and have a term of less than one year. These funds have a very low risk with very little volatility.
Bonds – Medium to long-term investments with a maturity term of between 3 to 20 years. Bonds offer guaranteed income in the form of coupons, and the capital value rises and falls in response to changes in interest rates over time.
Inflation –The cause of increases in the prices of the things we buy. In order to make our money grow, we need to invest in portfolios that will earn interest that is higher than the inflation rate.
Equities – Provide investors with ownership in a company. Equities are volatile in the short-term and are therefore considered to be more long-term investments in order to lessen the risk over time. Income is paid in the form of dividends, and capital growth can occur if the share is sold for more than it was bought for.
Property – Tangible type of investment that is immovable, which make it “less liquid” than other asset classes. Property provides investors with a regular income in the form of rental income. There is a potential for capital growth if the property is sold for more than it was bought for.
Participatory bonds – Are mortgage bonds over immovable property, through which the investor receives regular interest. A participatory bond has a minimum investment term of 5 years after which one needs to give 3 months’ notice to disinvest.
The Ombud for Financial Services Providers (FAIS Ombud)
Tel: 0860 324 766
Fax: (011) 348 3447
Registrar of Collective Investment Schemes
The Financial Services Board (FSB)P O Box 35655, Menlo Park, 0102Physical address: Riverwalk Office Park, Block B41 Matroosberg Road, Ashlea Gardens Ext 6, Menlo Park, 0081
Toll-Free: 0800 202 087 or 0800 110 443
The Association of Savings and Investment SA (ASISA)
Cape TownBridge House1 Mariendahl LaneNewlands7700
PO Box 23525Claremont7735South Africa
Tel: +27 (0) 21 673 1620
Fax: +27 (0) 21 673 1630
Johannesburg2nd Floor195 Jan Smuts AvenueGrosvenor CornerRosebank2193
PO Box 52115Saxonwold 2132
Tel: +27 (0)11 214 0960Fax: +27 (0)11 447 5018