A Study of Collective Investment Scheme V/S Mutual Fund

Sonal Pruthi

16 Jan, 2021

A Collective Scheme is provided under Section 11AA (2) of the SEBI (The Securities and Exchange Board of India) Act: This article describes the difference between Collective Investment Scheme and Mutual Fund.

Any arrangement offered by the Company in order to make contributions, payment made by the investor, utilized for the purpose of the scheme offered, in order to receive profits or property, from such scheme of arrangement. The contribution or investment by the investor which is a part of the scheme is managed on behalf of the investor by Collective Investment Scheme Company.

Collective Investment Scheme is offered to:

1. Co-operative societies registered under the Cooperative Societies Act, 1912
2. Non-Banking Financial Companies, under section 45-I of RBI Act, 1934
3. The Company providing the Contract of Insurance, under Insurance Act, 1938
4. The Company providing for pension scheme, Insurance scheme, under Employees Provident Fund,  and Miscellaneous Provisions Act, 1952
5. Companies accepting deposits under Section 73 of Companies Act
6. Deposits Accepted by Nidhi Company u/s 406 of Companies Act, 2013
7. Deposits by Chit Business in Section 2 Chit Funds Act, 1982
8. Any deposits made for the purposes of Mutual Funds are not considered for the Collective Investment Scheme.

Exceptions

Any investment or funds not registered with the Board or deposit not covered in the above-stated points is not considered a Collective Investment Scheme. However, where any corpus more than 100 crores or more of the above deposits are regarded as Collective Investment Scheme.

SEBI Guidelines: A Perspective

As per the SEBI (Collective Investment Scheme in India) Regulations, 1999

It means any company which takes deposits under its CIS scheme should be registered with the Companies Act 2013 and is enrolled with the SEBI Act 1999^[1] to work as Collective Investment Scheme.

Requirements for a CIS Scheme are:

1. The applicant must be a company registered under the Companies Act 2013
2. The Company’s core objective should be a Collective Investment Scheme, which is to be stated in the Memorandum.
3. The applicant must be eligible for its registration.
4. The total asset should be worth 5 Crore. While, at the time of registration, the total net worth can be 3 Crore, which should reach within 3years a total net worth of 5 Crore gradually, after the date of its registration.
5. Fifty percent of Directors in the Company must be people who are independent and who are not directly or indirectly connected to the people in authority.
6. The people in the Company should have requisite qualification and expert knowledge over the subject matter of the Collective Investment Scheme.
7. The Company registered for the Collective Investment Scheme shall continue.
8. The CIS must be started as a TRUST.
9. THE CIS Company must regularly update its investors about the ventures undertaken on their investment. In order to educate and aware investors about the negative impact of the investment, which can happen.
10. The CIS will only act as trustee for any other Collective Investment Scheme.

Participants of CIS 

Mutual Funds

Meaning

Mutual Fund is the mechanism of accumulating the money from the investors by issuing units to them and investing the funds in accordance with the objectives laid down in the Offer Document.

The Mutual Fund Company is called Asset Management Company (AMC), where the combined funds are referred to as Asset under Management (AUM) which are then invested by the Mutual Fund Company expertise. The holding of the fund is called Portfolio.

The investments are made by the Company in the varied securities like stocks, shares, or bonds across a wide section of industries and sectors, where the risk is diversified, as all the stocks may not be proportion every time. The profits or losses are shared in the proportion of their investment.

A mutual fund company has to be registered under SEBI before it collects funds from the public. The following are the features of a mutual fund:

• Money collected from different investors
• Operated by money managers
• Who allocate the fund’s assets and produce the income from the fund for the investor
• The investor gets access to the diversified Portfolio at lowered prices
• The Company charges annual fees for its operation.

Legislation Governing Mutual Funds in India

Mutual funds are the funds that were regulated by Unit Trust of India, 1963. Later, UTI was made NON-UTI. After the coming of Securities Exchange Board of India, 1992 (SEBI), the SEBI Mutual Fund regulations 1996 were laid under the Act. After this, The Association of Mutual Fund in India was established.

Mutual Funds In India: The Working

1. The Funds are regulated under the purview of SEBI.
2. A minimum capital required is 500 million and 200 million for open and close-ended transactions.
3. A minimum 5 years of experience is required for the funding manager to operate.
4. SEBI registration is compulsory.
5. The sponsors form a trust to hold all the assets of the fund either by appointing a new Asset Management Company or choosing an existing Asset Management Company.
6. AMC shares the Portfolio with the investors.
7. The account statements and financial statements should be sent to the investor regularly.
8. It provides easy liquidity to the investor.

Participants of Mutual Funds

Conclusion

A collective investment scheme is better on the ground of tax efficiency. A traditional Mutual Fund is taxable on both dividends and capital gain distributions if held outside the retirement plans. Both are offered for retirement plans, but the better option is CIS. CIS has lesser restrictions compared to mutual funds. In the case of the investment, the investment is made by an investor in a large number of securities. Investment can be made in complex securities with greater availability of investment.

Read our article:Collective Investment Schemes: An Overview