Collective investment is a type of trust management with a low entry threshold that allows small investors to invest in the stock market, real estate market, precious metals and others, making a profit from investing their money. This is an investment of the combined capital of investors, which makes it possible to earn, significantly increasing your capital.
Affordable Investment Market
In countries with developed stock markets (European countries, the UK, the USA), the concept of collective investment is available to almost everyone, because almost the entire population invests in this tool to increase capital. Particularly popular are accumulative products of insurance companies and pension funds.
The collective investment segment makes it easier for small investors to access revenues from the colossal capital invested in financial markets, protecting them from dishonest issuing companies and, in addition, providing an investment stream to the country's production.
Financial instruments of the Russian investment market are largely beyond the means of private investors due to the high entry price threshold, the need to understand the principles of the investment market and the widespread reluctance of issuing companies and intermediaries to load themselves with unnecessary work with unskilled investors investing small amounts. The government debt market in the form of securities is not adapted to work with the funds of small investors, and some of the government securities were not originally intended for investment by the population.
Collective investment is an ideal financial instrument providing a variety (diversification) of securities in the investment portfolio, which significantly reduces the risk of investments. Independent investment requires appropriate market knowledge to fully work with invested money. Even the contribution of several small investors is not enough to purchase a minimum lot in an investment competition or in a large brokerage company. But the funds of thousands of small investors already have an impressive investment power, which can act as a buyer or seller in the investment market.
History of occurrence
In ancient Egypt, trusts already existed, which form the basis of collective investment. On the basis of trusting and guardian relations, the innumerable wealth and property of the Egyptian pharaohs and their heirs were managed. The guardians were usually the representatives of the caste closest to the head of state - the priests. Discovered historical findings indicate that already in those days there were orders of hereditary property, wills and guardianship of minor royal persons.
The Middle Ages further contributed to the development of relationships based on trust, thanks to the Crusades. At first, property owners transferred their locks with the family under the protection and control of an authorized person for the duration of their participation in the campaigns. Uncertainty in his return forced him to take long-term measures to reassign the rights of the recipient of income instead of himself - to the heir, spouse. Gradually, a similar practice began to be used in relation to any property.
The legally formed first investment fund appeared in Belgium in 1822, later in Switzerland in 1849, then in France in 1852. In the United States, only after the Second World War, sustainable investment funds began to develop, seriously hindering the investment activities of banks, competing with other financial institutions.
Benefits of Collective Investment
- Investment funds are managed by professionals, qualified and experienced, with the necessary skills to work, which is extremely important for working with large investments. In this, funds win against single small investors.
- The management of a large portfolio of small investments leads to significant savings due to the scale of operations. As a result, investors do not overpay for management, receiving another benefit from investing in a collective investment fund.
- When buying a small number of shares on the stock market, it is incredibly difficult for a small investor to diversify (diversify) his investment portfolio to reduce risk.
- The activities of collective investment entities are controlled by law and regulated in favor of the interests of investors.
Disadvantages of Collective Investment
The risk of investing in collective investments is practically reduced to zero thanks to the control and supervision of the Central Bank of the Russian Federation. But nevertheless, when considering the possibilities of collective investment, it is worth considering one significant minus of this common financial instrument. The lack of collective investment is the lack of responsiveness with significant fluctuations (volatility) of the market. The big money “bag” changes the rate too slowly, therefore it loses in the event of a sharp drop in prices. But if we take into account that the subjects of the collective investment market invest in very conservative instruments, then this drawback does not play a decisive role.
Types of collective investment
Collective investments in the investment market are represented in Russia by insurance companies, non-state pension funds (NPFs), mutual investment funds (UIFs) and general banking management funds (OFBU).
Moreover, insurance companies not only undertake to pay a small excess profit on invested funds - they provide a range of insurance services. As well as pension funds, which, in addition to the effective management of the collective investments of pensioners, guarantee the payment of a lifetime pension. These are significant differences between NPFs and insurance companies from mutual funds and OFBU, where financial managers are engaged only in managing money, without providing any other services.
Collective investment entities
The subjects of the collective investment market are the following representatives:
- Shareholders - equity holders, who bought back a share in the total investment "bag"; shareholders are holders of shares.
- Fund - investment money "bag".
- The founders of the management are the owners of the investment fund.
- A collective investment management company is a legally registered company that employs professional financial managers.
- Depository - a repository of securities certificates.
- Registrar - keeps records.
- Auditor - revision of documents, process.
- Independent appraiser - determines the market value of assets.
- Supervisors - exercise control.
Collective Investment Objects
Collective investment funds invest in a wide range of instruments. The main ones are listed below:
- Securities.
- The property.
- High value stocks.
- Units of foreign ETFs (exchange traded funds).
- Cryptocurrency (digital payment tool).
The role of investment funds in the economy
The principle of operation of investment funds is based on the idea of transferring property under trust. An investor trusts his money or property under the management of professionals - this is the basis of the work of all investment funds. The activities of the collective investment fund are professional money management, making a profit with further distribution among investors who invested their funds in the fund.
For solid entrepreneurial business structures, collective investment has an economically important meaning, which consists in the efficient distribution of funds in the economy. Institutional investor funds are used to increase the liquidity and power of the economy, the development of innovations, and contribute to the solution of civil and social obligations historically assigned to this group of investors.
The main participants of the collective investment and trust management market, such as insurance companies, non-state pension funds, are the most important source of medium and long-term financing due to their large investment horizons, in contrast to speculative investment, which is characterized by high risk, while the attitude to risk of institutional participants is extremely conservative .
Classification of investment funds
Collective investment funds are grouped according to the following criteria: by investment purpose, by type of assets included in the portfolio, operating structure, legal form.
- By organizational and legal forms. Collective investment funds are formed as a legal entity - an open joint stock company or in the form of a property complex, the management of which is entrusted to a specialized management company, under an agreement with the owners of the managed property. Trusts as a type of investment fund and trust agreements between founders and a trustee are historically created only in countries with the English legal system.
- Corporate funds. The most recognized structure among funds. A closed corporate fund is formed like a joint stock company, by subscribing to issued shares or by investors buying shares in the secondary market. Such corporate investment funds are legally owned by their shareholders, but management is performed by the director on behalf of the shareholders. Corporate funds invest in assets agreed with shareholders - stocks, bonds, collective investment in real estate and others. Dividend income and interest on the assets of the investment portfolio are usually distributed between the participants of the fund - shareholders.
- The earliest corporate funds were formed in the UK in the form of trusts in the 1860s and still exist.
- A common form of corporate fund is mutual funds or mutual investment funds in the United States. In the UK - open investment companies for private small investors. In France - investment companies with variable capital, which at each moment of its existence corresponds to the real value of the fund.
Supervisory authority
By order of the Bank of Russia (06.06.2016 No. OD-1860), distribution control and supervision of the collective investment segment is implemented through the collective investment and trust management department.
In particular, the Pension Fund of the Russian Federation is monitored at the point of investing funds of insurance contributions for funded pension, employer contributions to the insured person also take place.
The Department of Collective Investments monitors the work of managing companies - according to the point where they take actions to distribute pension reserves and invest in order to accumulate pension income and trust management of investment reserves of joint-stock investment funds.
Collective investors
Investors participating in collective investments are market investors. Thanks to numerous collective investors, the collection and accumulation of funds takes place. The latter form the basis of the collective investment segment. Commercial banks and similar organizations, represented by investors in the form of deposits and other mutually beneficial short-term placements, act as intermediaries that raise the money of investors. The funds of potential investors are stored on the accounts of insurance companies and Pension funds for longer periods and are withdrawn only upon the occurrence of an insured event or retirement age. In the case of mutual funds, where the functions of raising and investing funds are performed in one person, a private investor carries his money for the specific purpose of increasing his capital.
The aspect of long-term investments in the collective investment system in Russia is of great importance in improving the well-being of citizens through participation in the growth of capitalization of the economy. The funds of collective investors sold through investment mechanisms are involved in the overall financial turnover, thereby launching the necessary economic process for the efficient distribution of funds.
Taxation
The rate of income tax on individuals with collective investment is 13%. It is precisely the profit from the sale of the subject of investment. The tax is withheld by the investment management company. Tax is calculated at the beginning of the year for the previous year. The income goes to the investor’s account in a "pure" form.