All You Need to Know About Collective Investment Scheme (CIS) In India

Investing can often seem like a confusing task, especially for those who are new to the financial world. However, in a country like India where the investment industry is constantly changing, there are numerous options available for individuals to grow their wealth. One such option is Collective Investment Schemes (CIS). 

Regulated by the Securities and Exchange Board of India (SEBI), CIS offers a unique opportunity for investors to pool their funds together and invest in a diversified portfolio, which is then managed by professionals.

In this comprehensive guide, let us learn about the Collective Investment Scheme (CIS) in detail, including its meaning, features, examples, exemptions, and more. 

What is a Collective Investment Scheme?

A Collective Investment Scheme (CIS), also known as a Pooled Investment, is a type of investment structure where multiple investors pool their money together into a single fund and this fund is then managed by a professional investment manager or management team. 

Later, this pooled capital is invested in a diversified portfolio of securities such as stocks, bonds, commodities, real estate, or other assets in accordance with the investment objectives of the fund.

CIS can be better understood with the help of the following pointers:

• Pooling Money: In a Collective Investment Scheme, instead of investing individually, people combine their funds to invest in a specific asset or multiple assets.

• Objective: The main goal of a CIS is to earn returns on the money invested. As an investor, you can hope to make profits or receive income from your investments.

• Distribution of Returns: Any returns generated from the investments are distributed among the investors on the basis of the terms agreed upon at the time of scheme joining. 

• Control: Notably, investors don't control the operations or management of the scheme directly. Instead, a professional or entity oversees its day-to-day operations and all investment decisions. And, this entity or professional is appointed by the company managing the scheme. 

.Common Examples of Collective Investment Schemes

The topmost examples of Collective Investment Schemes or CIS are: 

• Mutual Funds
• Real Estate Investment Trusts (REITs)
• Private Equity Funds
•  Exchange-traded Funds (ETFs)
•  Hedge Funds

Key Characteristics of Collective Investment Scheme

 Mentioned below are the critical features of CIS:

• Regulation: In India, the Securities and Exchange Board of India (SEBI) oversees and regulates CIS to ensure transparency and fairness. By adhering to regulatory standards and guidelines, CIS providers maintain transparency and accountability in their operations.
• Pooling of Funds: In a Collective Investment Scheme (CIS), individuals combine their money into a single investment pool. This approach allows them to benefit from a more diversified investment portfolio. Moreover, instead of managing investments individually, pooling funds allows people to access a broader range of assets, potentially reducing risk and enhancing returns.
• Diversification: Another key feature of CIS is the allocation of pooled funds across various asset classes like stocks, bonds, and real estate. This diversification helps you spread investment risk across different assets, which in turn minimises the impact of poor performance from any single investment. 
• Professional Management: Within a CIS, skilled fund managers oversee investment decisions. Their primary objective is to allocate pooled funds strategically to achieve the scheme's goals and generate optimal returns for investors. 
• Units: Investors who are participating in a Collective Investment Scheme receive units or shares corresponding to the amount they have invested. The value of these units reflects the performance of the scheme's underlying assets. 
• Risk and Returns: Always remember that the performance of CIS is subject to fluctuations based on the performance of its underlying assets. Like every other investment product, CIS carries inherent risks, and returns might also vary over time. Also, different CISs have varying risk profiles based on their investment strategies and asset allocations. So, you as an investor should always assess your risk tolerance and investment objectives before participating in a CIS.

Eligibility Criteria for Collective Investment Scheme Registration

The eligibility criteria for companies to get registered for CIS are as follows:

• The company's main goals, as stated in its Memorandum of Association, should include managing collective investment schemes.
• The company applying must be legally established and registered under the Companies Act of 1956.
• The company should have the necessary infrastructure to operate a collective investment scheme according to relevant regulations.
• At least half of the directors of the company should be independent and not connected to those in authority over the company.
• The company must meet certain standards to be considered suitable and lawful for registration.
• The company's total assets should be Rs. 5 Crores or more. However, at the time of application, it must have a net worth of at least Rs. 3 Crores, which should increase to INR 5 Crores within 3 years of registration.
• No one associated with the company should have previously been denied registration by the Board under the Act.
• The directors and key staff of the company should be honest, reputable, and have sufficient knowledge and experience in the field. They should not have been convicted of certain crimes or violated securities laws.

Exemptions Under Collective Investment Scheme

The Collective Investment Scheme regulated by SEBI excludes the following:

• Any scheme that's actually an insurance contract covered by the Insurance Act doesn't fall under CIS.
• If the money contributed is more like subscribing to a mutual fund, it's not part of a Collective Investment Scheme.
• Deposits accepted under Sections 73 to 76 of the Companies Act, 2013, are not considered part of a Collective Investment Scheme.
• Programs related to schemes, pension schemes, or insurance schemes under the Employee Provident Fund and Miscellaneous Provisions Act, 1952, don't fit into the CIS category.
• Anything that falls under the definition of chit business according to the Chit Fund Act, 1982, isn't seen as a Collective Investment Scheme.
• If a non-bank financial company (NBFC) is taking deposits, that's not considered a Collective Investment Scheme.
• Schemes made by cooperative societies or societies registered under the Societies Act aren't classified as CIS.

Key Participants in a Collective Investment Scheme (CIS)

The following are the key participants in the Collective Investment Scheme:

• Trustees: The Trustee is an important member in the establishment of a Collective Investment Scheme (CIS). Typically, the CIS is set up as a trust, with the Trustee in charge of making sure that the scheme complies with all applicable rules and laws. The Collective Investment Management Company chooses the Trustee and their duties include safeguarding the scheme's assets and serving the interests of the investors.
• Fund Manager: The management and supervision of the funds inside the CIS fall under the purview of the Fund Manager. Their primary objective is to make investment decisions that will maximise returns for the investors. This includes determining the unit prices of the scheme, evaluating the overall value, and actively managing the investment portfolio to achieve the scheme's objectives.
• Shareholders: Those who make financial investments in the CIS are known as shareholders. Shareholders will receive returns on their investment as per the conditions specified in the contract they signed when they joined the scheme.  Shareholders also have a claim to the assets of the scheme, which is proportional to their investment. This ensures that all participants are treated fairly and have a stake in the scheme's success.
• Collective Investment Management Company: A Collective Investment Management Company is an entity established under the provisions of the Companies Act, 2013 or the Companies Act, 1956. It is also required to be registered under the SEBI (Collective Investment Schemes) Regulations of 1999. The primary purpose of such a company must be to operate, organise and manage Collective Investment Schemes (CIS). 

Conclusion 

Collective Investment Schemes (CIS) act as a valuable avenue for individual investors in India who are willing to diversify their portfolios. Regulated by the Securities and Exchange Board of India (SEBI), CIS allows investors to pool their funds and access a diverse range of assets such as stocks, bonds,  and more. As an investor, you can benefit from some of the topmost features of CIS that involve diversification, distribution of returns, etc.

So, assess your investment objectives and risk tolerance and start participating in any CIS of your choice now. 

Frequently Asked Questions (FAQs)

Q 1. How are returns distributed in a Collective Investment Scheme?

Ans. Returns generated from investments in a CIS are distributed among investors based on the terms agreed upon at the time of joining the scheme.

Q 2. Who controls the operations and management of a Collective Investment Scheme?

Ans. Investors do not directly control the operations or management of a CIS. Instead, a professional or entity appointed by the managing company controls and manages the CIS.

Q 3. What are some common examples of Collective Investment Schemes?

Ans. Mutual Funds, Real Estate Investment Trusts (REITs), Private Equity Funds, Exchange-traded Funds (ETFs), and Hedge Funds are some of the common examples of Collective Investment Schemes.

Q 4. What should investors consider before participating in a Collective Investment Scheme?

Ans. Investors should assess their investment goals and risk tolerance. They must also consider the eligibility criteria and exemptions, before participating in a CIS. 

Also Read: A List of Safe Investment Plans Offering High Returns in India