A collective investment scheme is an arrangement that enables a number of investors to 'pool' their assets and have these professionally managed by an independent manager. Investments may typically include gilts, bonds and quoted equities, but depending on the type of scheme may go wider. For example some investments may be in unquoted investments or property. Investors in such schemes are able to reduce risk by spreading their investments more widely than may have been possible if they were investing in the assets directly. The reduction in risk is achieved because the wide range of investments in a collective investment scheme reduces the effect that any one investment can have on the overall performance of the portfolio.
The definition of a collective investment scheme can be found in section 235 of the Financial Services and Markets Act 2000 (FSMA).
UK collective investment schemes come in a number of forms. The two main ones are Authorised Investment Funds (AIFs) - the collective term for authorised unit trusts (AUTs) and open-ended Investment Companies (OEICs) - and unauthorised unit trusts (UUTs). The main distinction for unit trusts is whether or not it is authorised by the Financial Services Authority (FSA). Open-ended investment companies can be set up in the UK only as FSA-authorised collective investment schemes, and there is no UK resident unauthorised equivalent. Authorisation in turn determines to whom schemes can be sold and in what assets they can invest. Authorised investment funds are treated differently from Unauthorised Unit Trusts for tax purposes.
A body corporate, other than an OEIC, is not a collective investment scheme for the purposes of section 235 FSMA. This means for example that investment trust companies, venture capital trust companies, industrial provident societies, friendly societies and building societies are not collective investment schemes for the purposes of section 235 FSMA.
