Decoding collective investment schemes

How do you select the right companies and bonds? There are so many options available. If you’re just starting out, it can be overwhelming.

Collective investment schemes (CIS) are there to help you.

A CIS is a lot like a cake. To bake a cake, you need a few ingredients. When you add all of those ingredients together and bake them, only one delicious cake comes out of the oven. Most of us don’t eat a whole cake in one sitting, so we buy a slice (or two) of the cake.

CIS are also made up of ingredients – shares in different companies, property shares, bonds and cash. All of those ingredients are baked into a product.

As an investor, you buy a slice of the product: a unit or a share.

When you eat a slice of cake, you’re actually eating five different ingredients.

When you buy a unit or a share in a collective investment scheme, you’re buying all the different ingredients that make up that product.

There are different types of collective investment schemes; our favourites are:

Unit trusts; and Exchange traded funds (ETFs).

Different types of assets can be put into a special account called a trust. Unlike normal bank accounts, trust accounts are managed by a designated person or company: a trustee. A lot of the time, more than one person benefits from the trust. A person benefiting from a trust is a beneficiary.

A unit trust is a type of CIS. The account has the type of assets ordinary people want to invest in.

For example, a trust can be made up of shares in different companies, shares in property companies and some bonds. It can even have some cash in the bank.

The trustee decides which companies to invest in and how much of each type of asset should be in the trust. The trust then buys all of those assets and stores them in the account.

You can become a beneficiary of the trust by buying slices of it, called units. Buying units in a unit trust gets you some of all the shares, property, bonds and cash held by the trust.

Not everybody wants the same type of investment. Some people prefer to own a lot of shares, but only a few bonds. Others don’t want too many shares and would feel safer having some cash.

You can choose a unit trust that holds the type of assets that you prefer. – Just One Lap