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Advantages of Collective Investment Schemes
The main advantages of investing in a Collective Investment Scheme are:
- diversification and spreading risk;
- access to the expertise of a professional investment manager;
- access to wider markets;
- less administration; and
- lower costs.
Diversification and Spreading Risk
Investment managers will generally try to diversify a fund's portfolio by investing money across a wide range of asset classes (equities, bonds, cash, property etc), and across different regional markets and even industry sectors. It is considered prudent to invest in a minimum of 15 different stocks and shares across different sectors. A CIS, however, generally invests in approximately 50 to 100 different stocks and shares. The main reason for this is to spread the risk of the investment. For example, if all of a fund's capital is invested in FTSE 100 shares then it will be totally exposed to any volatility in that particular index. To prevent this, a fund can reduce its exposure to that index to 10% and invest the remainder in other assets. Therefore, if the value of the FTSE 100 goes down the loss to the fund can be potentially minimized if it is exposed to other better performing assets and markets.
Access to the Expertise of a Professional Investment Manager
The fund manager must be trained and will have experience in making investment decisions. They will have a large amount of information at their fingertips which would be very difficult for the average individual to obtain or properly evaluate.
Access to Wider Markets
A CIS makes it easier for ordinary investors to invest overseas and in other specialist markets. This is because they can use the services of a professional investment manager who will have the expertise, the contacts and the experience to deal in these markets. It is also another way to achieve portfolio diversification.
Less Administration
Each time stocks or shares are bought or sold there is a certain amount of administration that is required. This is often time-consuming for investors. By investing in a CIS, however, the investment manager completes the administration on behalf of investors. For example, if an investor changes address and has invested in 15 different company's shares they will have to write to each of the registrars to update this one change. However, when investing in a CIS they will just need to inform the manager.
Lower Costs
Because a CIS is a pooled fund the cost of investing is shared between thousands of investors.
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Disclaimer: The material and information contained on this website is provided for general information only. DATA does not provide any investment advice and you are recommended to obtain professional financial advice where appropriate.
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