Collective Investment Fund (CIF):
Collective Investment Fund or Collective Investment Trust (CIT), similar to mutual funds, is a pool of funds aimed to make a large portfolio of diverse investments primarily to reduce costs through economies of scale, held by a trustee bank or a trust company.
The assets are procured from individuals or companies and are usually used for retirement plans, insurance, and pensions. Also they are tax- exempt investments only available to investors with a qualified employer-sponsored retirement plan.
Other names for CIF include common funds, collective trusts, common trust funds, commingled trusts, etc. CIFs have gained a lot of attention in the previous decade for the reason that they differ from mutual funds and provide alternative options for people.
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Types of of Collective investment funds
- A1 funds, these are the funds used for objective like investment or reinvestment
- A2 funds, which are used for purposes like profit sharing, stock bonus, retirement plans, benefit plans,
How Collective Investment Fund Works?
CIFs are unregulated funds operated under Office of the Comptroller of the Currency (OCC). They look like mutual funds but differ from them in several ways. They are unregistered investment pools unlike mutual funds.
Collective investment funds are pooled in a hub and spoke structure and through the use of economies of scale with pensions and profit sharing funds, intended to lower costs managed by a trustee, usually a bank or a financial institution.
This means that Collective Investment Funds operate as trusts that’s why they are also termed as Collective Investment Trusts. Still these trustees use investment companies or mutual funds companies to operate or manage these trusts portfolios like Franklin Templeton, Invesco Balanced-Risk Commodity Trust, etc.
CIF Investments
Participants in the CIFs are the beneficial owners of the funds and they receive the profit that is generated from the assets. People down own any specific asset but collectively the group of assets. Banks acting as the trustee and in the best interest of the people are also the legal owners of the funds and their assets. They invest in bonds, mutual funds, stocks, derivatives, etc.
Collective investment funds are aimed to decrease operational and administrative costs by choosing different assets. Funds from different sources are collected and put up in a strategy which is designed by a trustee that is a bank or a financial institution. All the funds are collected in a single master asset and used to maximise the investment performance.
CITs in the recent years have gained much attention which is evident from the fact that approximately $3 trillion was invested in 2018 in CIFs according to a study from the research firm in Singapore and which is expected to go way higher in the upcoming years.
Key Takeaways
- CITs are tax exempt investment funds that are put together by a trustee and usually offered through retirement or employee welfare benefit plans.
- CIF are unregulated by Security And Exchange Commission and operate under Office of The Comptroller of The Currency.
- CIF is showing a good representation in 401(k) plans, because of its lower cost in operation and management.
Collective Investment funds (CIF) History
CIFs were launched in 1927, just before the Great depression of 1929-30. Due to their nature of pooled investment, they were restricted or confined due to their perceived large contribution in the economic downfall. However it saw a comeback in the 21st century through employer retirement plans or benefit plans.
It became popular because of its increased visibility on electronic mutual funds trading platforms. It became a default option for contribution plans according to Pension Protection Act 2006.
Target Date funds, which is a type of long term investment where riskier assets are invested in the early years and conservative assets are invested in the later years as the target date for the objective approaches such as a retirement plan, is an appropriate framework for Collective Investment funds.
Advantages of CIF
- CIFs are tax- exempt earnings
- They incur lower management and distribution costs due to economies of scale.
- Helps in obtaining a diversified portfolio
- CIFs are compliant with bank fiduciary norms like banks obligation to keep money secured for their clients and act in their best interests.
- As compared to mutual funds, they have lower operating costs due to the fact that they are unregulated and do not need to comply with the requirements of Securities and Exchange Commission (SEC)
Shortcomings of CIF
- CIFs as of now are only available in the form of retirement plans through employers and cant be purchased by the public like mutual funds through a broker
- They present fewer investment options
- They are difficult to track and analyse
- They provide less apparent choices
- Mutual funds are managed by a group of managers or a mutual fund manager appointed by the board of directors but CIF are managed by a manager appointed by the trustee.
What is CIT in finance?
CIT in finance meaning can include:
Corporate income tax
Tax which is paid by domestic or multinational companies on their income, and is regulated by the income tax act, but can change annually on course of union budget in India is called corporate income tax.
Cash-in-transit
Cash-In-transit is a service which means to move funds or large amounts of cash safely to protect from theft or loss. A large armoured vehicle is used to protect money or valuables or other high security methods are used.