Collective Investment Scheme

A Collective Investment Scheme (CIS) is an investment scheme offered by any company under which the payments made by the investors are pooled and used with an objective to get profits, income and then, is managed on behalf of the investors. A CIS includes mutual funds, exchange-traded funds (ETFs), hedge funds, and private equity funds. Depending on the CIS fund's investment objectives, these schemes offer investors the potential for capital appreciation and income generation. 

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What is a Collective Investment Scheme (CIS)?

The Collective Investment Scheme definition is an investment method where groups of individuals pool their money together and invest it in different best investment options, like:

  • Stocks

  • Bonds

  • Real estate

  • Other assets

With CIS, you can access a wider range of investment options and reduce the risk of losing all your money on just one investment.

The primary purpose of a CIS is to provide individuals with access to a diversified portfolio of investments that may be challenging or costly to achieve individually. 

This scheme is managed by professional fund managers who make investment decisions on behalf of the investors. Each investor owns units or shares in the scheme, proportionate to their investment amount. 

Note: 

  • SEBI regulates Collective Investment Schemes in India

  • The SEBI (Collective Investment Schemes) Regulations, 1999, and subsequent amendments define the participants' roles and responsibilities.

Examples of Collective Investment Scheme:

Some examples of a Collective Investment Scheme SEBI are as follows:

  • Mutual Funds

  • Exchange-Traded Funds (ETFs)

  • Hedge Funds

  • Real Estate Investment Trusts (REITs)

  • Private Equity Funds

What are the Features of Collective Investment Scheme (CIS)?

The key features of a Collective Investment Scheme SEBI are listed below:

  • Pooling of Funds:  CIS allows pooling together funds from multiple investors who hold relatively smaller amounts of money. It helps them to invest collectively in a diversified portfolio of assets, which may not be accessible to them individually

  • Professional Management: Professional fund managers manage CIS. These professionals analyse market trends, conduct research, and select suitable investments aligned with the scheme's objectives

  • Diversification: This scheme provides investors with access to a diversified portfolio of investment asset classes, sectors, or geographic regions. Portfolio diversification helps mitigate the impact of poor performance in any one investment on the overall portfolio

  • Ownership through Units or Shares: Investors in a Collective Investment Scheme own units or shares that represent their proportionate ownership in the scheme. The value of these units or shares is directly linked to the performance of the underlying assets. Investors can buy or sell units/shares, allowing for liquidity and flexibility in managing their investments

  • Transparent Reporting: CIS typically provides regular reports to investors, disclosing the scheme's financial information, performance, and holdings. This transparency helps investors monitor their investments and make informed decisions

  • Regulatory Oversight: CIS is subject to regulatory oversight in most jurisdictions. Regulatory authorities impose rules and regulations to protect investors' interests, ensure transparency, and promote fair practices in the operation and management of collective investment schemes

  • Investment Objectives and Strategies: Each CIS has its investment objectives and strategies. Some schemes focus on capital appreciation, aiming for long-term growth. Other plans emphasise on generating income through dividends or interest payments. The scheme's investment strategy outlines the types of assets it invests in and the risk profile it maintains

  • Accessibility and Affordability: CIS offers access to investment opportunities that may otherwise be challenging for individual investors to access or afford. By pooling funds, investors can benefit from economies of scale, professional management, and reduced transaction costs. 

What are the Exemptions under Collective Investment Scheme? 

A Collective Investment Scheme SEBI does not include the following categories of schemes:

  • Any scheme/ arrangement made available by a co-operative society or by a society that is registered or presumed to be registered under any current State law relating to co-operative societies;

  • A scheme/ agreement under which non-banking financial companies take deposits;

  • Any scheme/ arrangement that is an insurance contract to which the Insurance Act applies;

  • Any Plan, Pension Plan, or Insurance Plan that is outlined in the Employees Provident Fund and Miscellaneous Provisions Act of 1952;

  • Any scheme or arrangement that accepts public deposits under Section 58A of the Companies Act of 1956 (1 of 1956);

  • Any scheme or arrangement whereby a business certified to be a mutual benefit society or Nidhi under section 620A of the Companies Act, 1956 (1 of 1956) accepts deposits;

  • Any scheme or arrangement that satisfies the criteria for chit business under Section 2(d) of the Chit Fund Act of 1982 (40 of 1982);

  • A scheme or arrangement in which payments are made in the form of subscriptions to mutual funds;

Who are the Participants in a Collective Investment Scheme?

In India, the participants in a Collective Investment Scheme (CIS) can include various entities and individuals. Here are the common participants involved in a CIS:

Participants Details
Sponsor
  • The sponsor is the person/ entity responsible for proposing, initiating and setting up the Collective Investment Scheme
  • They fulfil the necessary regulatory requirements and appoint the asset management company (AMC)
  • A sponsor ensures compliance with regulatory requirements
  • They are required to meet the eligibility criteria set by the Securities and Exchange Board of India (SEBI) and must have a sound track record and financial standing
Asset Management Company (AMC)
  • The AMC is responsible for managing and operating the Collective Investment Scheme
  • They make investment decisions, manage the portfolio, and carry out the day-to-day activities of the scheme
  • The AMC must be registered with the Securities and Exchange Board of India (SEBI)
Trustees
  • The trustees act as custodians of the fund's assets, protect the interests of the investors, and oversee the activities of the AMC
  • A trustee ensures that the scheme operates in accordance with the regulations and trust deed
  • They must be independent of the sponsor and the AMC and are required to obtain SEBI's approval for their appointment
Custodian (Optional)
  • A custodian may be appointed to safeguard the securities and other assets held by the scheme
  • The custodian ensures proper segregation and safekeeping of assets and performs related functions as per the regulations
  • The custodian may also perform related functions as specified by SEBI
Investors
  • The investors are the individuals, institutions, corporate entities, and other eligible participants who contribute funds to the collective investment scheme
  • They pool their money together with other investors to invest in a diversified portfolio of securities or other assets
  • Investors can include individuals, institutions, corporate entities, retail investors, high-net-worth individuals, corporate bodies, trusts, and other eligible participants
Registrar and Transfer Agent (RTA)
  • The RTA is responsible for maintaining records of investors, transfer of units, and processing subscriptions and redemption requests
  • They help in managing the administrative functions of the CIS and ensure efficient handling of investor transaction
Distributors/ Intermediaries
  • Distributors or intermediaries play a role in marketing, selling, and distributing the CIS units to the investors
  • They can be banks, financial institutions, brokers, agents, or other authorised entities authorised by the AMC
  • Distributors help in promoting the scheme, assisting investors with the investment process
  • They provide information and guidance on the scheme's features and benefits

Eligibility Criteria for a Collective Investment Scheme

SEBI defines the eligibility criteria for a Collective Investment Scheme in India. Some of the essential eligibility criteria to join a CIS is as follows:

  1. Sponsor Entity Type: 

    The sponsor should be a corporate body under any of the following-

    • Registered under the Companies Act, 2013

    • Limited Liability Partnership (LLP)

    It should have the necessary legal status to establish and manage the CIS.

  2. Track Record: 

  3. The sponsor should have a minimum track record of 5 years in the financial services business

  4. This ensures that the sponsor has relevant experience and a proven track record in handling financial matters

  5. Financial Standing: 

  6. The sponsor should have a minimum net worth of Rs. 5 crores

  7. This requirement ensures that the sponsor has sufficient financial stability to support the establishment and management of the CIS

  8. Fit and Proper Criteria:

  9. The sponsor, trustees, and directors of the AMC should have a good reputation, be of sound mind, and not have been convicted of any economic offences or regulatory violations

  10. The fit and proper criteria ensure that only individuals with integrity and competence are involved in managing the CIS

  11. Registration with SEBI: 

  12. The CIS, along with its Sponsor and AMC, should obtain registration from SEBI

  13. The registration process involves submitting the necessary application forms, documents, and fees to SEBI

  14. Compliance with Regulations:

  15. The CIS, its Sponsor, and AMC must adhere to investment limits, disclosure requirements, valuation norms, and reporting obligations

  16. They must comply with the investor protection measures specified by SEBI

  17. Appointment of Trustees:

  18. The CIS should appoint trustees who are independent of the sponsor and the AMC

  19. The trustees should obtain prior approval from SEBI for their appointment and should have the necessary qualifications and experience to fulfil their responsibilities

  20. Valuation of Assets:

  21. The assets of the CIS should be valued periodically in accordance with the valuation norms prescribed by SEBI.

  22. The valuation should be fair, transparent, and based on reliable methods to ensure accurate calculation of the net asset value (NAV) of the scheme

In Conclusion

A Collective Investment Scheme (CIS) in India is a regulated investment vehicle that pools funds from multiple investors to invest in a diversified portfolio of securities or other assets. The CIS operates under the rules and regulations set by the Securities and Exchange Board of India (SEBI) to ensure investor protection, transparency, and compliance. It allows individuals and institutions to access professional investment management, diversification, and potential returns while adhering to regulatory requirements.

FAQ's

  • What is an example of a collective investment scheme?

    An example of a collective investment scheme is a mutual fund. A mutual fund pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, and other financial instruments. The fund is managed by professional fund managers who make investment decisions on behalf of the investors. Each investor owns shares in the mutual fund, representing their proportional ownership of the underlying assets.
  • What is the collective investment scheme under SEBI?

    Under SEBI (Securities and Exchange Board of India), a Collective Investment Scheme refers to any scheme or arrangement that pools funds from multiple investors to invest in securities or other assets, as specified by SEBI. CISs include entities such as mutual funds, venture capital funds, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds (AIFs). SEBI regulates and oversees collective investment schemes in India to ensure investor protection and maintain market integrity.
  • What are the three types of collective investment schemes?

    The three main types of collective investment schemes are as follows:
    • Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of securities. Professional fund managers make investment decisions for mutual funds on behalf of the investors.

    • Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges, similar to individual stocks. They represent a basket of securities such as stocks, bonds, or commodities and aim to track the performance of a specific index or sector.

    • Unit Investment Trusts (UITs): UITs are investment vehicles that pool funds from investors to purchase a fixed portfolio of securities. The assets are typically not managed actively. The securities held in UITs have a specified maturity date, after which the trust is dissolved, and the assets are liquidated and distributed to the investors.

  • What is a collective investment scheme in competition law?

    In competition law, a collective investment scheme refers to an arrangement where multiple independent entities pool their resources or assets to invest in a particular venture or business activity. 

    It involves cooperation between separate entities that join together to jointly invest in a project, usually to share risks, costs, and potential profits.

    Under competition law, collective investment schemes are scrutinised to ensure compliance with antitrust regulations.

  • What is a Collective Investment Management Company?

    A Collective Investment Management Company (CIMC), also known as an Asset Management Company or Investment Management Company, is a financial institution or company that is responsible for managing and operating collective investment schemes on behalf of investors.

    The main functions of a CIMC include the following:

    • Portfolio management of the investors

    • Administration of the CIS Fund

    • Compliance and regulatory oversight over the CIS

    • Providing investor services like account management, investor communications, and addressing investor queries

  • Can an existing collective investment scheme raise further funds?

    Yes, an existing collective investment scheme (CIS) can raise further funds. However, there are some restrictions on how this can be done.

    Under the SEBI (Collective Investment Schemes) Regulations, 1999, a CIS can raise further funds by either:

    • Making a public offer: This involves issuing new units to the public. The CIS must first obtain a fresh certificate of registration from SEBI before making a public offer.

    • Making a private placement: This involves issuing new units to a limited number of investors. The CIS does not need to obtain a fresh certificate of registration from SEBI to make a private placement.

  • How does a collective investment scheme work? 

    A collective investment scheme, like a mutual fund or unit trust, pools money from multiple investors to create a large investment fund. Professional managers then invest this money in a diversified portfolio of assets such as stocks, bonds, or real estate. 

    Investors buy units or shares in the scheme and receive a proportionate number of units based on their investment. They can buy or sell units on a daily basis. The scheme charges fees to cover management costs. Regular reports and disclosures are provided to investors.

  • How to register a collective investment schemes? 

    Here are the key points on how to register a collective investment scheme:
    • Determine the jurisdiction where you plan to establish and operate the scheme.

    • Engage legal and financial professionals experienced in securities laws and regulations.

    • Prepare documentation such as a prospectus or offering memorandum.

    • Conduct due diligence on the investment manager or management team.

    • Ensure compliance with applicable regulatory requirements.

    • Submit the completed registration application and supporting documents.

    • The regulatory authority will review the application and may request additional information.

    • If approved, the scheme will be registered and can legally operate.

    • Ongoing compliance with regulatory obligations is necessary after registration.

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.

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