Collective Investment Scheme

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:

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.