Collective investment funds are a type of investment instrument established and administered by Asset Management Companies, or AMCs. These financial products are particularly suitable for savers and households that wish to increase the value of their equity over time by entrusting the management of their assets to a qualified professional.
A piggy bank divided into shares
A company that specialises in asset management collects money from individual investors and establishes a single autonomous equity fund, distinct from that of the AMC itself or any other subject involved in the fund’s operation. The collective equity fund can then be invested in different financial activities (equities, bonds, government securities), following specific investment policies approved by the Fund’s rules. The collective fund’s assets are divided among the individual investors in the form of shares, which confer equal rights. Any gains and potential losses are then divided proportionately to the number of shares held.
The importance of diversification
This type of investment allows savers to limit the risks compared to an investment in an individual security on the financial market. By subscribing to a collective fund, savers can diversify their investments without needing vast amounts of available capital.
However, diversification does not guarantee a fixed return on a given date. Profit depends on the performance of the financial market and the securities in the portfolio.
What do professional asset managers do?
Asset managers generally adopt an active management strategy for the fund. This means that they manage the portfolio by increasing or reducing exposure to various sectors or individual securities based on strategic long-term or tactical short-term decisions. The AMC offers its customers access to the professional skills and expertise needed to operate efficiently on the markets and aims to invest the savings under its management to maximise the value over the medium-long term.
The lawfulness and rigour of this management service is monitored by a complex system of controls implemented by CONSOB, the Bank of Italy and, in the first instance, auditing companies and the custodian bank where the fund’s securities and cash are held.
Collective investment funds: a classification
Collective funds can be classified in various ways. The initial distinction regards closed-end funds and open-end funds:
- closed-end funds raise fixed capital by issuing a fixed number of shares established when the fund is created. Members subscribe their shares before the capital is invested, and redemptions are only possible at set deadlines;
- open-end funds have variable capital and can issue and redeem shares at any time. These are the most common form of collective investment fund.
Open-end funds also include the so-called “EU harmonised investment funds”, financial products subject to European regulations that have a strong focus on reducing risk and protecting the interests and savings of shareholders. Non-harmonised funds, on the other hand, are not subject to any restrictions under European law and offer greater investment freedom in any direction, with no limitation on risk profile. This category includes speculative investment funds (hedge funds) and funds of funds, which invest their capital in shares in other funds rather than in primary financial instruments such as equities or bonds.
Based on the instruments chosen for the investments, harmonised funds (Assogestioni classification) are divided into:
- equity funds: these mainly invest in equity securities and have a potentially higher risk and return profile;
- bond funds: these mainly invest in ordinary bonds and government securities and are characterised by a lower level of risk;
- weighted funds: they can invest in equity or bond instruments with various weightings, with the aim of diversifying investments and obtaining a variable risk profile based on the portfolio composition.
In all of these cases, however, savers are protected by European regulations in investment decisions. The UCITS IV Directive of 2009 provides for the quantification of risk of each fund on a scale of 1 to 7 (Summary Risk and Return Indicator), where 7 represents the highest level of volatility. The riskiness of an investment is calculated based on the fund’s performance in the five previous years and is an important piece of data for comparing different funds.
By law, investors must be able to make conscious and informed decisions. Key information on risk, targets, investment policies and management costs are contained in the Key Investor Information Document (KIID), the document that the AMC must provide to savers in good time prior to subscription.
How does a collective investment fund differ from other asset management instruments?
The Consolidated Law on Finance classifies collective investment funds as UCIs, Undertakings for Collective Investment. A collective investment fund, being constituted “as an autonomous equity fund, divided into shares, established and managed by an asset manager” differs from other forms of UCIs, such as investment companies with variable capital (ICVCs), investment companies with fixed capital (ICFCs) and exchange trade funds (ETFs).
ICVCs and ICFCs offer the same type of investment services as AMCs but differ from them due to their nature as joint-stock companies. The capital administered by ICVCs and ICFCs is not autonomous and instead corresponds to their share capital. As such, investors buy shares in the company that manages their money, becoming a shareholder and acquiring the rights, duties and risks associated with corporate shareholding.
ETFs are also known as index funds because they reflect the performance of equity or bond indices, reproducing the composition of a certain market segment or reference benchmark. Unlike collective investment funds, ETFs are managed according to a “passive” approach. Once the fund is established, the management company faithfully mirrors the market index.
Why invest in a collective investment fund?
Subscribing to a collective investment fund enables savers to invest their savings without needing to be a financial expert. The law requires AMCs to provide the maximum level of information at all phases of the investment.
To increase the value of the equity formed using the shares of the various members, the manager is required to select securities, market sectors and geographical areas according to specific diversification criteria. This means the risk of losses for individual investors is limited.
Access to financial markets through collective investments funds is also facilitated by highly flexible subscription methods and the fact that savers don’t need enormous amounts of capital at their disposal. There are several ways to invest in collective funds. One way is to subscribe a set amount in a single instalment, known as a Capital Investment Plan (CIP). Another popular method is the Capital Accumulation Plan, which enables savers to made periodic payments.
The innovation of the ethical collective fund
Collective investment funds are the ideal investment solution for savers who want to consolidate and grow their savings in the medium term and all the more so when the collective fund is specifically established to have a positive environmental, social and governance (ESG) impact.
Ethical funds are carefully constructed by selecting securities according to financial as well as ESG criteria. The manager conducts a rigorous evaluation in order to improve the risk and return estimate of the investments.
This creates a positive feedback loop, with investments that are less risky, more transparent, and that offer strong financial and ethical performance.
Please read the legal notices.