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What is a Collective Investment Scheme and How does It Work?

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Many of us these days are looking for ways to secure our financial future; the recent economic woes around the world have only made this need more pressing. There are many different opportunities to make money and one of these is a collective investment scheme. This is not something that is going to work for everyone and there are certainly some risks involved. The returns though can be high and it is worth considering if this option could work for you.

What Exactly is a Collective Investment Scheme?

The logic behind a collective investment scheme is that it is easier to make money as part of a group then as an individual. This is because while working as a collective it will be possible to cover a much wider range of investments than would be possible alone. You will often hear this type of scheme referred to as mutual funds or investment funds – it has in fact become one of the most common ways of investing money in the stock market. In short a collective investment scheme is where members pool money to invest and then share the profits from this.

There are many different types of collective investment schemes but most will have a fund manager. This fund manager is responsible for making the investment decisions and keeping members informed of what is going on; there is also usually a board of trustees to ensure that everything runs smoothly. The two main types of collective investment schemes are those that are official (usually recognized by official bodies) and those that are unofficial (for example, a group of people just joining forces to invest their money as a group). A collective investment scheme can have a limited number of shares (called a closed end fund) or one where new shares can be created if more money is invested (called an open end fund).

The Advantages and Disadvantages of a Collective Investment Scheme

Like most other things in life there are advantages and disadvantages associated with a collective investment scheme. The main advantages include:

  • When you choose a collective investment scheme you are reducing your risk and probably increasing your chances of making money. The fact that the money is spread out over a lot of investments increases the chances that there will be profits – although this is not always the case. If you just invest in one company then the share value could plummet and you will be left with nothing; with a collective scheme you have a finger in many pies.
  • There are usually fewer dealer costs when you invest as part of a group; the burden of this is spread over more people and investments.
  • You are benefiting from the knowledge and expertise of the group of investors; there can be power in numbers.

As well as advantages with a collective investment scheme there can also be disadvantages including:

  • You will likely have to pay money for the fund manager and this will eat into your profits.
  • You will have less power to make choices when you are part of a group. If the group goes in a direction that you think is unwise you will probably just have to go along with.
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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


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