Collective funds, or collective investment trusts, are similar to mutual funds. Both generate returns from a mix of asset classes. They both also rely on pooling money from many investors together into one fund, which a professional money manager controls. However, collective investment trusts are taxed and regulated differently from mutual funds, so they often have lower fees and report earnings differently.
A mutual fund is a financial product in which investors can add their money to a large pool of money, which is all collectively managed by professional money managers. Characteristics of mutual funds vary, such as the mix of asset classes in the fund and whether it is actively or passively managed. Mutual funds allow small investors, such as individuals outside the finance industry, to have access to professional money management.
Collective Investment Trust
A collective investment trust is similar to a mutual fund, but it is owned and operated by a bank or trust company and sells only to institutional investors, such as 401(k) plans. Collective trusts do not sell to individual investors. Collective trusts have two kinds: A1 trusts, which have funds contributed by banks, and A2 trusts, which hold funds that pension plans and investors other than banks contribute.
A collective trust has different legal obligations from a mutual fund. It is not required to issue dividends or report its earnings in a prospectus. This means that it is harder to check the current value of money in a collective trust, but the trust can offer a lower expense ratio due to the lower regulatory burden. Collective trusts are also barred from advertising, so they are harder to find.
In both types of funds, the investors group all their money together. One individual investor cannot offer enough funds to interest a professional money manager, but the collective pool of many investors is worth a professional's time. Both collective trusts and mutual funds operate on this principle. The larger pool allows for greater diversity of investment and more flexibility as well as the ability to invest in more complicated securities.
Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.