Collective investment scheme as a strategy for lower cost investments

Collective investment schemes invest in a broad range of securities, sometimes at lower cost due to negotiation skills and size of the investable funds.

There are also benefits from diversification techniques that are usually only available to big investors who are able to buy significant positions in a wide variety of securities. This limits investment risk by reducing exposure to a possible decline in the value of any one security.

A collective investment scheme is an arrangement or entity which collects and pools funds from the public or a section of the public for the purpose of investment in the interest of each investor represented by their proportional ownership in the pool.

The scheme is a pool of assets established and managed by a scheme management company on behalf of the investors, who invest by buying shares pursuant to contracts entered between each investor and the scheme manager. Contractual schemes are mostly well known in the UK market.

An investor in a collective investment scheme would invest in a single fund and, yet they enjoy the benefits of a diversified portfolio with a wide range of securities. Fund managers are also charged with the responsibility of deciding what securities to trade and they ensure that dividend payments are received and investor rights are exercised.

However, for those who want to invest their money in the schemes, it is better to make sure that the fund and its manager are approved by the competent authority.

The schemes are governed by Law n°40/2011 of 20/09/2011 regulating collective investment schemes in Rwanda.

The collective investment scheme business in Rwanda started with the RNIT Iterambere Fund; an open-ended balanced unit trust managed by a Rwanda National Investment Trust (RNIT), a licensed fund management company. The fund was launched in July, 2016. There are different types of collective investment schemes for different investment purposes. It is important to understand the investment objectives of a scheme before deciding to participate.

Unit trust scheme

A unit trust is a scheme whereby investors contribute small or large sums of money to a fund for investment in stocks, bonds, or other money market instruments by a fund manager. The fund manager invests on behalf of the investors. Each investor’s interest in the scheme assets is represented by units.

There are two types of unit trust schemes, namely, open-ended and close-ended. An open-ended unit trust is a scheme that offers for sale. In this scheme, the fund continuously creates and redeems units after the initial public offering (IPO). This implies unit holders can sell their units to the fund and they can buy more units from the fund. Those who did not participate in the IPO can buy units from the fund at any time.

So, if the purpose is to invest for a long period of time, with little risk of decline in the value of money, as well as easy and quick liquidation of the investment in case of need, an open-ended unit trust might be just appropriate.

A closed-ended unit trust is where the securities are not redeemable by the fund but may be bought and sold among investors through listing on the capital market.

In this scheme, the fund does not create new units nor redeem units from holders.

Investing in the unit trust

Buying unit in the unit trust confers the right of becoming a unit holder. Besides being an open-ended or closed-ended unit trust, unit trusts are established for different investment purposes. There are some, whose investment objective is shares. Hence the fund manager invests all or about 80 percent of the fund in shares. Some are set up to invest only in money market or fixed income instruments such as treasury bills, bonds, among others.

Irrespective of the investment objective, the trustees of the Fund are expected to inform the investing public about the investment objectives. Also the prospective unit holder is expected to be aware of this before committing their money into the scheme.

The writer is the legal and corporate affairs manager at Capital

Market Authority

christine@cma.rw