The importance of collective investment schemes

In every financial eco-system, there are three important players – those looking for money, those providing the money and in the middle the intermediaries. These intermediaries play a critical role of providing a platform connecting both money seekers and money providers. One of such intermediary platforms providing this enabling vital function are Collective Investment Schemes (CIS).

For many decades, CIS have persisted as a viable intermediary instrument for financial markets. The CIS industry continues to show a strong concentration in emerging markets thus giving credibility to its importance in growing such markets. Despite being a viable intermediary instrument within the financial ecosystem, how they operate, and their regulation are not common knowledge.

It is essential that people, especially those who access funds regularly for their businesses have an appreciable knowledge about the dynamics of Collective Investment Schemes. What they are, how they operate, how to invest, their significance of etc. are key areas individuals and institutions must grasp in order to make informed individual and business decisions.

The Securities and Exchange Commission (SEC) defines CIS as “Pools of funds that are managed on behalf of investors by a professional money manager”. What this means is that CIS involves individuals pooling funds and transferring the authority to a fund manager whose job it is to manage the money. The fund manager is expected to invest the pooled money and distribute the gains made from the investment based on the quantum of each contributor. It is critical to note that each CIS has its own mandate that governs how the fund manager manages the funds and distributes earnings.

There are different types of CIS usually defined by the nature of the investment mandate. For example, with money market funds, the CIS buys a mix of short-term instruments such as treasury bills, fixed deposits etc. on behalf of investors. Money market funds provide avenues for investors with similar risk and duration appetite to put their monies together and invest. Another example is equity funds, a type of CIS that provides similar opportunities for individuals seeking exposures in equities through pooled funds.

At this point I am sure you are wondering if you can bring your friends together and operate a CIS. The simple answer to this is ‘No’. CIS are regulated and it is, thus not allowed, by law, for you to start a CIS without a license from the SEC.

CIS in Ghana, depending on the framework, is either a mutual fund or a unit trust. If it operates as a mutual fund, it has to be set up in such a way that it has a board of directors, a custodian bank, and a fund manager and must hold annual general meetings. If the scheme operates as a unit trust, it must have trustees who are responsible for ensuring that the fund managers are acting in the best interest of the contributors and so on.

Regardless of how a CIS operates, it holds enormous benefits for the financial eco-system. It provides a broader array of indirect investment avenues for investors and also serves as a source of funds for those looking for funding. CIS can also help mitigate the risks of investors by distributing the investments across a wide range of assets limiting the effect of a possible decline in the value of any one security on the entire scheme. One caution to people who are looking for CIS opportunities though is to look out for the ones that are licensed and regulated by the SEC and have mandates aligned with their investment objective and time horizon.

The Securities and Exchange Commission currently has 46 listed mutual funds and 23 listed unit trusts in Ghana including STANLIB Cash Trust and the STANLIB Income Fund Trust. https://sec.gov.gh/licensees/

Miriam Amissah Head, Business Development STANLIB Limited