Understanding collective investment schemes

If you are an investor – or you’re thinking of investing – you may have heard of collective investment schemes. While the idea behind such schemes is relatively simple, there are different kinds you can choose from. Each type of collective investment scheme has its benefits and drawbacks, from unit trusts and exchange-traded funds (ETFs) to open-ended investment companies (OEICs).

What are collective investment schemes?

Collective investment schemes (CISs) are pooled investments. Essentially, you and others put money into the investment, which is managed by a professional fund manager. They invest the money in assets, including shares, bonds, government gilts, property, or even other CISs.

By pooling capital, collective investment schemes can open up investment opportunities that wouldn’t be available to you as an individual investor. By investing the capital across a range of different securities, a CIS will also spread the investment risk. Some types of CISs also offer tax benefits.

What types of collective investment schemes are there?

There is a variety of collective investment schemes you can choose from. Here is how some of the most popular work.

Unit trusts

A unit trust is a mutual fund managed by trustees. You pool your money with that of other people to generate capital for the trust. A fund manager then invests this capital across various assets, aiming to spread and reduce risk. The fund is then divided up into equal-sized ‘units’. The number of units you hold will depend on how much money you’ve invested. If the value of the pooled investments grows, the value of your units goes up and vice versa. You can sell your units when you wish, aiming for a higher price than you paid.

If a unit trust is making money, you may also get a return on your investment. If you have ‘income units’, you’ll receive regular payouts. Alternatively, any income will be reinvested alongside your existing units if you have ‘accumulation units’. It’s worth noting that if you sell units at a profit or receive income from them, you may have to pay capital gains tax (CGT). Any income generated may also be liable to tax.

OEICs

OEICs work in a similar way to unit trusts; the key difference is that instead of buying units, you buy shares in the investment company itself. As with a unit trust, a fund manager will invest the pooled capital across various asset classes.

If you invest in an OEIC that is making money, the value of your shares is likely to increase. You can then sell them for a profit. In addition, if you buy ‘income shares’, you’ll receive dividends. If you have ‘accumulation shares’, your dividends are automatically reinvested. Again, if you sell shares, you may have to pay CGT, and any income generated may also be liable to tax.

ETFs

ETF stands for ‘Exchange Traded Fund’. When you invest in an ETF, you are one of many people pooling their money. This money is generally invested in a ‘basket’ of securities – stocks, bonds, and commodities – traded on a stock exchange. ETFs generally try to invest broadly in a way that tracks a market segment. This could be an index like the FTSE 100 or S&P 500, or they might track bonds, specific industries, commodities, or currencies. The big difference between ETFs and other collective investment schemes is that they don’t need a fund manager – they are passive investments. This means they can be cheaper to invest in.

ETFs are traded on exchanges, meaning you can buy and sell them on the open market. It’s important to select ETFs with a risk profile you’re comfortable with. Some are designed to track very narrow market segments, meaning they can be much more volatile than ETFs that track broad indexes. If you profit from an ETF, you may have to pay CGT, and you may also have to pay dividend or income tax.

What are collective investment funds?

You may also have heard the phrase ‘collective investment funds’ (CIFs); this is just an alternative name for collective investment schemes.

Is an ISA the same as a collective investment scheme?

No. An Individual Savings Account (ISA) differs from a collective investment scheme, although it shares some similarities. You can put up to £20,000 per year in a Cash ISA, a Stocks & Shares ISA, or a combination of the two. You don’t pay tax on any gains you make and ISAs are not subject to dividend or income tax.

If you have a Stocks & Shares ISA, your ISA manager can invest your funds in certain types of collective investment scheme, but there is no obligation to do so.

What is an unregulated collective investment scheme?

An unregulated collective investment scheme (UCIS) is not regulated by the Financial Conduct Authority. These are often high-risk investments, and the FCA restricts who they can be sold to. If you want to find out whether the FCA regulates a collective investment scheme, you can check their register.

What are the benefits of collective investment schemes?

Putting money into collective investment schemes offers you a wide range of benefits. Some of the key advantages include the following:

Diversification. By pooling investments with others, you can invest in a broader range of asset types than you could as a single investor.
Opportunity. With large amounts of pooled capital, you can invest in markets that are hard to access directly.
Lower risk. A broader portfolio is generally lower risk than investing in a small number of assets. If one part of the portfolio goes down in value, it may be offset by increases in other parts. However, do remember some ETFs track narrow market segments, making them likely to be more volatile.
Lower cost. Costs are spread among all investors, meaning large transactions, in particular, will cost you less than an individual investor would pay.
Expertise. If you choose a scheme such as a unit trust or OEIC with dedicated fund managers, you’ll benefit from their experience and expertise. This can lower the risk of your investment.
Simplicity. Whether you choose a scheme with a fund manager or one that passively tracks a market segment, you don’t have to spend time on the day-to-day administration of your investments.
Tax efficiency. With the right advice, you can build a tax-efficient investment portfolio.

When should I consider investing in a collective investment scheme?

Everyone’s finances and financial goals are different. That’s why talking to an independent financial adviser before investing is a good idea. They’ll be able to analyse your finances and your goals to help you put a plan in place to achieve them. Then they can talk you through a wide range of options such as ISAs, pensions, and even using pension to buy commercial property.

Need help with your investments?

Speak to one of our independent financial advisers to find out more.

Speak to us: 01603 967967

Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.

The value of tax benefits depends on your individual circumstances and the laws concerning these can change.