Understanding The Collective Investment Trusts: A Complete Guide for Rookie Investors

Introduction 

The world of banking is tricky to understand. Isn’t it scary when you listen to terms like mortgage-backed security, CDO (Collateralized Debt Obligation), and subprime mortgage? All of these terms are linked to the doomsday depicted in the big short. The big short exposed the hidden risks and crimes that appeared to be safe investments. A collective investment trust is not as complex as compared to mortgage-backed securities but focuses on investing in pooled assets. 

A comprehensive guide to collective investment trusts, their benefits, and better investment decisions:

What is a Collective Investment Trust?

A collective investment trust (CIT), also known as a collective investment fund (CIF), is a scheme that involves pooled investment. Pooled investment is the process of combining the money of multiple investors to form a single portfolio. These have a specific investment strategy. CITs are owned or maintained by trust companies and banks. CITs are available through employer-sponsored retirement plans, pension plans, and insurance companies. CITs are called common trust funds, collective trusts, and common funds. 

How do CITs work? 

CITs are often compared to mutual funds, but unlike them, CITs are not controlled by the Security and Exchange Commission (SEC) or the Investment Act of 1940. CITs are regulated by the Office of the Comptroller of the Currency (OCC) and the Department of Labor (DOL) in some specific cases. They allow banks to avoid small lot investments and do not need a registration statement. Just like mutual funds, CITs own shares of public companies and have the right to address their issues. They are not required by the law to share their records and do not allow their investors to be involved in the decision-making process on fund management. CITs can vote on issues related to a company but do not have to report or let investors take part in the fund governance. 

What are the different types of CITs?

• Equity CITs: These invest in stocks.
• Bond CITs: Mainly invest in bonds 
• Balanced CITs: It is a mixture that includes investing in both stocks and bonds.
• Unit Trusts: They are large funds of investments pooled together by the trustees. Units are created whenever investors withdraw money.
• ETFs: Exchange Trade Funds try to replicate the index performance. An ETF trades on a stock exchange where an individual can buy or sell it like company shares. 

Collective Investment Trusts vs Mutual Funds

CITs and mutual funds share some key differences, and they are: 

What are the seven types of investments?

Investing is a structured process that requires a wise decision-making process. Well, it is not just about spending money, but a strategic way to increase an individual’s wealth. Before investing, it is important that people know about the different types of investments. 

Here are the seven types of investments: 

• Stocks 
• Bonds 
• Mutual Funds 
• Exchange Trade Funds(ETFs) 
• Segregated Funds
• Index Funds 
• GICs 

.Potential Risks Involved With Collective Investment Trusts

CITs are not regulated by the Security and Exchange Commission (SEC), resulting in a lower level of protection for investors. 

Collective investment trusts have limited transparency, unlike mutual funds, as they do not provide details regarding the trust’s holdings and performance. Due to this, investors find it difficult to assess their risk possibilities and take swift actions against it. 

CITs are only limited to qualified retirement plans and are not available to individual inventors. Due to this limitation, its accessibility is available only to big and well-established investors and not the general public. 

Conclusion 

Investing has become an important aspect of the modern world. It is a strategic approach to improve an individual’s wealth. It is important that people should invest cautiously. When it comes to collective investment, trusts are not as complex as mortgage-backed securities. They are quite similar to mutual funds and involve investing in pooled assets. 

Well, collective investment trusts are an interesting aspect of investment. CITs have certain setbacks, and people must understand their benefits and limitations to make better investment decisions.