What it means
The idea behind a collective investment vehicle is simple: combine many small amounts into one large portfolio. A single investor with $5,000 cannot easily buy a spread of shares and bonds, but by joining a pool the same investor owns a slice of hundreds of holdings.
A professional manager makes the investment decisions on behalf of the group. The pooling brings three main benefits.
The first is diversification, meaning risk is spread over many investments rather than concentrated in one. The second is lower dealing costs per investor, and the third is access to markets and strategies that would otherwise be out of reach.
Value is tracked using net asset value, usually shortened to NAV, which is the worth of everything the fund owns minus what it owes. Dividing by the number of units in issue gives a price per unit, and investors buy or sell at or near that price.
Funds report it daily or at some other regular interval. Investors pay for the convenience through fees, typically an annual management charge expressed as a percentage of assets, sometimes with dealing or performance fees on top.
Over many years even a small difference in annual fees compounds into a large difference in outcome, so comparing the total cost of ownership is important. The structure varies by country and type.
Some vehicles are open-ended, allowing investors to join or leave at the NAV price, while others are closed-ended with a fixed number of units that trade on an exchange. Regulation also differs, so the protection available to investors depends on where and how the vehicle is set up.
Taxation and reporting also differ between structures. Some vehicles pass income straight through to investors, who are taxed on it personally, while others pay tax inside the fund.
A company holding fund units should ask its accountant how gains, distributions and fees are treated in its own accounts before it invests, as the answer affects both the return and the reporting.
In practice
Real-world examples.
Example
A salaried employee invests $400 a month in a diversified equity fund through her workplace savings plan. She owns units in a pool of several hundred companies without choosing any of them herself. Her contributions buy more units when prices are low and fewer when they are high, which smooths the average cost over time.
Example
A company treasurer places $3,000,000 of surplus cash in a money market fund for a few weeks. The fund invests in short-term, high-quality debt and the treasurer can redeem units at the daily NAV when cash is needed. The treasurer checks the fund's liquidity terms and its credit quality before approval, because cash must be available when needed.
Example
A property developer invests in a closed-ended real estate fund that owns office buildings. The fund has a fixed number of units, so exiting early means selling units to another investor on the exchange rather than redeeming them from the fund. The developer accepts the lower liquidity as a trade-off for the rental income and the access to buildings that would be too large to buy alone.
Formula
Calculation
NAV per unit = (Total assets - Total liabilities) / Number of units in issue
Suppose a fund holds investments and cash worth $52,000,000 and owes $2,000,000 in fees and other liabilities. Net assets = 52,000,000 - 2,000,000 = $50,000,000. With 5,000,000 units in issue, NAV per unit = 50,000,000 / 5,000,000 = $10.00. An investor holding 2,000 units therefore owns 2,000 x 10.00 = $20,000 of the fund.Case study
Seen in the real world.
Fernhill Family Office is an illustrative, fictional firm managing money for three related families. Its portfolio had grown into more than forty separate holdings, each bought directly, and tracking them took considerable staff time.
The investment lead moved the smaller, hard-to-monitor positions into three collective investment vehicles that matched the families' goals. Reporting dropped to a handful of lines and the families gained wider diversification at lower administration cost.
The annual fees on the vehicles added about $48,000 a year, but the firm saved more than that in staff time and trading costs. The illustrative lesson is that pooling can simplify and diversify, provided you weigh the fees against the benefits.
Watch out
Common mistakes.
- Assuming that a fund is automatically low risk because it is diversified, when the risk depends on what the fund actually invests in.
- Comparing funds on past performance alone and ignoring fees, which reduce returns every year.
- Treating all collective investment vehicles as equally easy to sell, when closed-ended and property funds can be hard to exit quickly.
Questions
People also ask.
What is the difference between a CIV and a mutual fund?
A mutual fund is one type of collective investment vehicle; the term CIV also covers unit trusts, exchange-traded funds and other pooled structures.
How is the price of a unit worked out?
Divide the fund's total assets less its liabilities by the number of units in issue, which gives the net asset value per unit.
Do investors own the underlying shares directly?
No, they own units in the vehicle, and the vehicle owns the underlying investments, so the investor's rights come from the fund's rules.
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