Question

What are 4 advantages and 4 disadvantages of collective funds rather than individuals investing on their own?

Answer 1

Collective Funds

In a collective fund, a group of investors pool their money and invest in a portfolio of assets. A collective fund is like a mutual fund but it only sells to institutional investors. It is operated by a bank or a trust company.

Advantages of collective funds:

1.Low costs

The costs of investing in a collective fund is low since investors share the costs of running the fund. It also has lower compliance costs.

2.Diversification

It invests in a variety of different investment vehicles and provides the benefits of diversification. The potential for loss is spread out here. You are not dependent on the success of just one or two investments.

3.Professional Management

Collective funds are managed by professional investors who have the experience and skill in increasing returns and managing risks.

4.Affordability

One can invest in a collective fund with small amounts of money. It does not require a large investment as that of direct investment.

Disadvantages of collective funds:

1.Dependence on professional manager

Since the professional manager is responsible for managing a collective fund, the returns depend mostly on the skills and judgment of the professional manager. Therefore, performance is not guaranteed.

2.Management Fees

The fees can be expensive.

3.Lack of control

Investors in a collective fund have no control over the choice of investment vehicles that make up the fund.

4.Withdrawals

Redeeming the investment in the short-term will incur a lot of costs. It will also impact the return of the investment.

I hope that was helpful :)