Collective investment allows individuals to pool their funds and invest together in different assets under professional management. In this article, we explain what collective investment means, the types of collective investment, the legal framework and the practicalities so that you can make an informed decision to protect your investment.
Collective investment is a way for several people to pool their money and invest it together in different financial assets, such as stocks, bonds or real estate. Instead of each investor buying individual securities on their own, they put their money into a fund that a professional manager manages for them.
The advantage is that by investing more, the fund can better diversify and reduce the risk of losses. In addition, investors can afford to enter into more complex investment vehicles that they would not have a chance of acquiring on their own.
Collective investment is thus often a safer and more affordable way to build wealth, especially for those who do not have the time or knowledge to invest on their own. On the other hand, it’s important to remember that no investment is without risk – even here you can lose some capital. That’s why it’s important to understand the basics of collective investment before putting your money in the hands of fund managers.
Even with collective investment, the investment is not free. Typical fees include:
Although it seems small, over the long term, fees can significantly reduce total returns. It is therefore important to know them and compare funds from this point of view as well.
Collective investment in the Czech Republic is not a free discipline. The basic legislation is the Investment Companies and Investment Funds Act, which sets out the rules for the establishment, operation and supervision of funds. This law protects investors and ensures transparency so that funds cannot use money irresponsibly.
In addition to Czech law, European directives such as UCITS (for unit trusts) and AIFMD (for alternative investment funds) apply to collective investment and set standards for the safety and management of funds across the EU.
Compliance with the rules is supervised by the Czech National Bank (CNB), which has the right to take action against funds or managers if they do not comply with the law. This regulation makes collective investment safer and more transparent for investors.
There are several main types of funds in collective investment, each with a different focus and rules. The best known are mutual funds, where both retail and larger investors invest. A mutual fund collects money and buys various securities with it.
For example, the ČSOB Equity Fund allows retail investors to put in sums as low as a few thousand crowns and invest in hundreds of stocks around the world. Such a fund diversifies risk – if some stocks lose, others can grow. In addition, the fund manager monitors the market daily and reacts to changes, so the investor does not have to be an expert. The minimum entry amount often starts at £1,000-5,000, which is affordable even for ordinary people.
Then there are qualified investor funds, which have less strict rules but are more for more experienced or larger investors.
A special category includes real estate funds, venture capital funds and private equity, which invest in, for example, real estate or start-up companies.
More recently, ETFs (exchange-traded funds), which are exchange-traded funds that combine the benefits of collective investment with the liquidity of equities, have been growing in popularity. Each type has its advantages and disadvantages, so it’s important to know their differences before you enter a fund. Any good financial adviser should be able to advise you on this.
Tip: Read our article for clear advice on how to get started investing in stocks.
Collective investment is not a wild ride backed only by investors. It works thanks to several important players. The most obvious is the investment company, which manages the fund, making decisions about buying and selling assets.
The custodian, on the other hand, is the financial gatekeeper that holds the fund’s assets and makes sure the manager treats them according to the rules. A portfolio manager is a professional who monitors the markets on a daily basis and selects the best investments.
Then there’s the distribution network, which arranges the sale of units to investors, and of course the investors themselves, who put their money into the fund.
Each fund has a constitution (detailing what the fund invests in, its objectives and rules) and a prospectus (comprehensive information about the fund, its fees, risks and history) which details how the fund works, what it invests in and what the risks are. Investors are provided with a KIID (Key Investor Information Document) before joining, which is a brief document summarising the most important facts about the fund.
There are investment management agreements between the fund and the manager which set out how the fund will be managed. The depositary signs a custody agreement with the fund. The investor buys units or shares of the fund under an investment agreement. All these documents are designed to protect investors and ensure that their money is managed transparently and responsibly.
Legal protection for investors is essential in collective investment. Service providers, i.e. management companies and depositaries, must follow strict rules to ensure transparency and fairness. For example, they must regularly inform investors about fund performance, fees or changes in investment policy. This is done through the aforementioned documents such as KIIDs or periodic reports.
The prohibition of misuse of information and conflicts of interest is also important – managers must act in the best interests of their clients. Moreover, regulation also protects retail investors from aggressive marketing or complex products that they might not understand properly. The whole system is overseen by the Czech National Bank, which can impose sanctions for non-compliance.
Despite strict regulation, legal problems can arise in collective investment. The most common are breaches of fund managers’ obligations, such as improper handling of assets or lack of information to investors. Investors can also bring claims if their rights are damaged or losses caused by negligence. For example, disputes often arise in relation to advertising. Some funds may use misleading marketing to persuade unwitting investors.
Tip: When you say capital markets, most people think of the stock market, stocks, big money and maybe a little adrenaline. But few people know that doing business in this environment is not just about good investments. If you’re about to enter the capital market, read on to find out what you can and can’t miss.
When you say collective investment, most people don’t realise that they have to deal with tax as well as investment returns. Fortunately, most funds are tax transparent, which means that taxes are dealt with at the level of the investors, not directly by the fund. For investors, this means that they have to declare gains from the sale of units or dividends paid on their tax return.
The situation is specific for certain types of funds or foreign investments where different rules apply. In addition, tax laws change frequently, so it’s a good idea to stay up to date or consult a lawyer if you’re not familiar with the current regulations.
Collective investment is therefore not just about asset management, but also about planning a tax strategy so that the investor does not pay unnecessarily high taxes.
Collective investment doesn’t just start – setting up a fund is a complex process that requires authorisation from the CNB. Fund promoters must submit detailed articles of association, a prospectus and prove that they have sufficient capacity to manage the assets. Once the licence is obtained, the fund can start offering units to the public.
The fund is not perpetual, as it may change, for example by merging with another fund or splitting into several parts. If the fund ceases to be profitable, or the trustees decide to close it down, there must be a liquidation where the assets are sold and the profits distributed to investors. The whole process is legally regulated so that investors are still protected.
Collective investment is constantly evolving, with modern technology and new trends coming to the fore. Digitalisation has made it possible to invest through online platforms, making collective investment more accessible to a wider range of people.
ESG investing – funds that invest for the environment, social responsibility and good governance – is also a big theme.
These trends are changing not only the approach of managers, but also regulators, who are placing more emphasis on sustainability and transparency. In turn, Brexit or global economic changes affect the rules and functioning of funds not only in Europe. So if you are going to get involved in collective investment, then you should be looking not only at the performance of funds but also at the wider context in which collective investment takes place.
Collective investment allows individuals to pool their finances and manage them professionally within different types of funds, such as mutual funds, qualified investment funds, real estate funds or ETFs. With a larger volume of investments, it is possible to better diversify risk and gain access to more challenging assets, but the risk of capital loss cannot be ignored. Investors face fees (entry, exit, management) that affect returns over the long term. Collective investment is regulated in the Czech Republic and the EU by the Investment Companies and Funds Act and European directives (UCITS, AIFMD), with oversight by the CNB, which ensures transparency and investor protection. The funds are managed by investment companies, depositaries and portfolio managers, and investors are provided with detailed documents (articles of association, prospectus, KIID) for informed decision-making. Investment returns are taxed at the level of the investors. The establishment and dissolution of the fund is strictly regulated. Current trends include the digitalisation of investing and the growing emphasis on ESG investments, which also affect regulation. Understanding all aspects, fees and legal protection is key to safe and effective collective investment, so that investors minimise risks and take advantage of opportunities.
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