What is collective investment?

On May 28, 2022

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Today we will talk about what collective investments are, since this information may be useful to many of our fellow citizens who are planning to profitably invest their savings. First of all, it should be mentioned that not only investors who have large capital at their disposal earn on capital investments. Currently, a huge number of our fellow citizens decide to try themselves as investors. Even in the absence of large savings, our fellow citizens have the opportunity to earn with the help of collective investments. Next, we will talk about what collective investments are, and also consider their main features.

collective investment. Peculiarities

The essence of the approach to investment under consideration is the creation of a specialized fund for consolidating the funds of small investors. The capital collected as a result will be used for investments in various sectors of the economy.

The described type of investment is suitable for those of our compatriots who do not have large savings and at the same time do not want to use them to open a bank deposit. Due to the fact that the funds collect funds from a huge number of investors, they manage to consolidate impressive capital, the investment of which allows you to expect to receive an impressive income. This income, in turn, will be distributed among contributors.

Each investor signs an agreement with the fund, which specifies the period for which the funds will be invested, the expected level of profitability and risks, as well as the conditions for receiving payments. The funds under consideration have the ability to attract funds from investors from all over our country. When a big capital fund consolidates, it becomes a significant market participant, and, therefore, can invest in various projects on more favorable terms.

The structure of a standard collective investment fund usually includes:

The management company, which is a key element of the fund and controls all investment processes. It is the management company that decides exactly where the consolidated funds of depositors will be invested.
A depository that keeps records of the fund's assets and monitors the functioning of the management company.
The registrar, which takes into account the ownership rights and shares of all participants in the fund.
An auditor whose main task is to control the reporting, as well as to verify the activities of the management company.

The main features of collective investment

If you are new to the investment field, then it will be useful for you to learn about the main features of collective investments that are common to all funds, regardless of their type and form:

Attracting funds from investors is carried out by signing an agreement or by placing the fund's securities in the free sale.
The main activity of the funds is to invest consolidated capital in various types of securities.
The fund receives its main income from dividends from transactions and interest.
The profit received as a result of investment activity is distributed among depositors in full accordance with the size of their deposits.

Collective investment funds also have a number of additional features, namely:

All funds invested by investors are transferred to the total mass of the fund's capital, and risk and return indicators are averaged.
The loss or profitability of the results of investment activities is necessarily recalculated between the participants of the fund, and then distributed among the depositors depending on the size of their contribution.
Investors bear the risks themselves, since the transfer of funds to the fund is carried out under their responsibility.
The Fund is unable to guarantee any fixed payments. It can only provide information in projected returns. Typically, this return is expressed as a percentage.
The investor, as a rule, at the time of signing the contract has the right to choose exactly where his funds will be invested. To do this, he needs to indicate the sectors of the economy in which the fund should invest its funds. If the investor has certain knowledge in the field of the stock market, such an approach is able to reduce the risk of losses.

Main forms of collective investment

Currently, there are several types of collective investments on the market, in relation to which different norms of domestic legislation apply. All existing companies specializing in collective investments can be divided into the following types:

pension funds.
AIFs.
mutual funds.
investment banks.
Credit organizations.

As for non-state pension funds, they became widespread after the pension reform, which introduced a funded pension system. Currently, each future pensioner can independently manage part of the insurance premiums and transfer them to state or non-state pension funds.

A non-state pension fund must transfer the funds of future pensioners to a management company, which, in turn, will invest them in certain assets. Individuals, entrepreneurs or commercial companies act as investors in non-state pension funds. The level of profitability of pension funds, as a rule, is not high and does not exceed 12%. Their activities are strictly controlled by the state, which makes investments in such funds quite safe.

Mutual and joint-stock investment funds

The main task of such funds is to consolidate the funds of investors for their subsequent investment in certain projects. Contributors of such funds will receive passive income, part of which will be withheld as a fee for the services provided by the fund.

The difference between joint stock and mutual funds is that the former is organized as a joint stock company and is a legal entity. Mutual funds are not registered as a legal entity. Also, the difference is that investors in joint-stock funds receive shares, and in mutual funds – shares.

Credit unions and organizations

The described companies, in fact, are consumer cooperatives that provide loan services. Currently, there are more than a hundred such companies on the domestic market, the total amount of assets of which exceeds 30 billion conventional units. The credit union has the status of a non-profit organization and is not formally aimed at generating income. At the same time, such unions have the status of a legal entity and are able to bring tangible income to their investors in the amount of up to 15% per annum.

investment banks

This type of specialized credit companies is not engaged in issuing loans, but in performing various operations in the stock market. Investment banks also provide a range of additional services, namely:

Assistance in the issuance and sale of bonds and shares.
Providing financial guarantees necessary for the initial public offering.
Issuance of bonds and bills.
The organizations in question also provide brokerage and dealer services.

As a rule, investment banks attract only large depositors, but in some cases they can also work with investors with small savings.

Strengths and weaknesses of collective investment

Among the key advantages of the described approach to capital investments, the following deserve special mention:

You will be able to receive a stable income, the amount of which usually exceeds inflation and bank deposit rates.
Investors' funds are managed by qualified managers, which is a guarantee of a balanced investment portfolio. Practice shows that newcomers, even with large capital, are simply not able to correctly compose an investment portfolio that can generate a stable income.
If you have a small capital, you can diversify risks only with the help of collective investments. This is due to the fact that a fairly impressive amount of funds is required to create a balanced investment portfolio.

Among the weaknesses of the considered approach to capital investments, the following deserve special mention:

You will be able to receive only passive income without taking part in the investment process. On the one hand, this is good, but on the other hand, you will not get the experience of working on the stock market on your own.
It is quite difficult to choose a truly effective fund, since there are many similar companies on the market today, so there is a possibility that you will entrust your own funds to a fund that will bring a minimal income.

Conclusion

If you want to make money on the stock market on your own, then you will have to open a specialized account with a brokerage company. From the huge number of brokers present on the market, it is recommended to choose those companies that have proven their reliability and offer favorable terms of cooperation: