Collective Investment Schemes

a men handing over money to a woman

A collective investment scheme, often called a mutual fund, is a way for investors to pool their money together and participate in capital markets by buying into a diversified, professionally managed portfolio.

Collective investment industries are in their advanced stages of development in South Africa and in Mauritius, the latter of which is an international financial centre. Collective investment schemes are also available to investors in other countries such as Botswana, Egypt, Ghana, Kenya, Morocco, Nigeria, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.

Several forms of legal structures are commonly used for such funds, the most common of them being unit trusts, investment companies or contractual pools. However, these different structures all share common characteristics, namely:

  • Diversification – funds reduce risk by investing in a range of financial instruments, with a  minimum required level of diversification being established in fund law or regulation;
  • Professional management – money raised by funds is invested by a management company that specialises in investment analysis and portfolio management;
  • Transparency – investors can monitor returns and receive regular reports on the progress of their investment;
  • Ease of administration – the company that manages the fund takes all the decisions and carries out all administrative procedures;
  • Market valuation – the shares or units are valued at current market values at stated intervals and published so investors can regularly monitor the value of their investment.

Investors may exit from a fund in one of two ways: if the fund has a fixed number of shares or units in issue (a closed-ended fund) and listed on a stock exchange, investors can sell their units or shares on that exchange; or, if the fund has an unlimited number of shares or units (an open-ended fund) investors can ask the management company to redeem their units in the fund.  Such funds redeem at regular intervals, often daily.

Collective investment schemes offered to the general public and the firms that manage them are licensed and regulated typically by the securities regulator of a country, in order to ensure that small investors’ interests are protected.

Legislation for collective investment schemes has been passed in several African countries, but the size of the industries is still are still relatively small in scale in most of them.

Investment in collective investment schemes is voluntary and requires for there to be a sufficient number of citizens with surplus savings to support them. In addition, because of the requirements for diversification and the need for liquidity to accommodate regular inflows and outflows of money, collective investment schemes need relatively highly developed stock, bond and money markets to provide an adequate range of investable securities. They are therefore more likely to be found in more developed African countries where both more advanced capital markets and higher levels of disposable income for discretionary savings are available.