What a CIS Is & the Regulatory Framework

A collective investment scheme (CIS) is an arrangement in which money is contributed by many investors and POOLED together, then invested and managed collectively as a single portfolio. Investors do not have day-to-day control over the management of the property; that is the essence of a CIS.

Investors participate in the returns or profits arising from the acquisition, holding, management or disposal of the underlying assets. Each investor owns a proportionate SHARE of the whole pool (for example, units in a unit trust) rather than owning any specific asset directly.

In everyday language these are commonly called 'funds' — unit trusts, mutual funds and exchange-traded funds (ETFs) are all examples of collective investment schemes.

Three characteristics define the appeal of a CIS:

• •POOLING — many investors' contributions are combined into one large pool, giving small investors access to markets, asset classes and minimum lot sizes they could not reach alone, and spreading fixed costs (dealing, custody, administration) across all participants.
• •PROFESSIONAL MANAGEMENT — a professional fund manager makes the investment decisions (asset selection, timing, rebalancing) within a stated mandate, so investors delegate research and portfolio construction to specialists.
• •DIVERSIFICATION — because the pool is large, it can hold many different securities, so the impact of any single holding performing badly is reduced. Diversification lowers unsystematic (specific) risk but cannot remove market-wide (systematic) risk.

In return for these benefits investors bear the scheme's fees and expenses and give up direct control over individual investment decisions.