As discussed in our previous articles, the importance of investing cannot be over-emphasised. In our two previous tips, we looked at how one can invest in shares and treasury bills (T-bills). In this article, let us focus on how to invest in collective investment schemes.
What is a collective investment scheme?
A collective investment scheme is an arrangement that involves pooling money from many investors for purposes of investing. Such an investment arrangement is also called a mutual fund. A financial institution is, therefore, established to pool money together and have control of investments made out of the pooled money. There are two types of collective investment schemes – a unit trust and an investment trust.
A unit trust
A unit trust pool funds under one umbrella and then manages them as a whole. As an investor, one buys units, the smallest part of the unit trust, which is used to invest in such financial assets as treasury bills, shares or bonds. An example of a unit trust in Malawi is Old Mutual Unit Trust.
A unit trust can create and sell to investors as many units as possible as it operates.
An investment trust
An investment trust works along the same principle of raising money from many investors to invest in assets that it manages on behalf of investors. The only difference is that an investment trust creates and sells a fixed number of units at the outset to investors. An example of an investment trust in Malawi is the National Investment Trust Limited (Nitl).
Why invest in a collective investment scheme?
There are many benefits of investing in a collective investment scheme and these include:
(i) That many investors pool money together, small investors are accorded a chance to invest in assets which they cannot afford individually. Put simply, little amounts of money pooled together can result in big investments. Such big investments usually give high return or profit. Hence, small investors can also enjoy high returns.
(ii) By investing as a trust, obviously costs that come with investment are lower compared to small individual investments. The cost of investments is, therefore, shared among many investors thereby reducing the cost to an individual investor.
(iii) Income earned by each unit is readily available for buying additional units. This means that a trust automatically reinvests the income one’s units has earned and hence increases the return.
(iv) The money placed in a trust is managed by professional financial institutions with access to information including investment opportunities. This, therefore, means the trust funds are invented in safe assets.
Notwithstanding the foregoing, one needs to know that the collective investment institutions charge a commission for the work they do on behalf of the small investors.
How are investors protected?
The Registrar of Financial Institutions regulates and supervises collective investment business. In addition, the registrar ensures that companies meet certain requirements before granting approval to list on the Malawi Stock Exchange (MSE) and issue shares or and debt instruments to the public. It is, therefore, implied that the small investors’ interest is safeguarded by the registrar.
Furthermore, the registrar resolves any disputes that may arise between the investors and the collective investment institutions.
If you have any questions on how you can invest; have more control of your money and be financially healthy, do not hesitate to contact:Email: financialliteracy@rbm.mw.
