If you've been wondering about the benefits of a Collective Investment Fund (CIF), then this article is for you. Whether you are an entrepreneur who could use some capital, a company looking to increase your investment portfolio, or a saver looking to diversify your investments and grow your money, CIFs have something for everyone!
This article will cover everything from how they work, who can invest in them, and what their risks and returns are likely to be like - so whatever questions you may have about CIF's will be covered.
Collective Investment Funds in a Nutshell
Let's start with the basic idea behind CIFs. CIFs are essentially portfolios of assets, which are pooled together and managed as a single unit. The assets that make up your funds may include stocks, bonds, cash, gold, real estate - anything that can be easily identified and owned individually.
CIFs are collective for 2 reasons:
- They provide a lower cost of investment than individual investment vehicles or portfolios like the ones we've discussed so far.
- They provide diversification - your investment is spread out amongst a large number of similar investments, rather than solely held in one investment vehicle.
Who Can Invest in a CIF?
There are two main types of CIFs: mutual funds and segregated funds. Here, we'll discuss how they differ from each other.
Mutual Funds
A mutual fund is a collective investment managed by an investment firm, which takes on investors' cash to buy stocks, bonds, gold, and real estate for resale.
Unlike the Individual Investment Account or Company Investment Account, mutual fund shareholdings cannot be individually transferred between investors.
The main benefits of investing in a Mutual Fund are:
- The Fund is likely to be more liquid than investments held in an Individual Investment Account or Company Investment Account - as these are usually invested only with similar investors (i.e.. individuals).
- You are investing in similar investments to other investors, which gives you a more diversified portfolio.
- You get professional management and investment advice, which will give you a better return on your money.
Segregated Funds
A segregated fund is a collective investment that invests in stocks and/or bonds but can be purchased and sold by investors like any other security. While mutual funds are actively managed, segregates are passively managed - this means their investments aren't actively chosen by people. Instead, they are bought and sold on the secondary market, in accordance with the Fund's Investment Policy.
Unlike mutual funds, you can buy and sell your shareholding. You are directly responsible for this part of your investment.
How is CIFs Taxed?
This is an extremely important question and one that you need to consider before investing in a CIF.
Just as with an Individual Investment Account or a Company Investment Account, you can decide whether you want to pay your taxes every year on your CIF investments (known as 'Realized Income') or whether you want to pay your taxes later (known as 'Deferred Income').
Deferred Income will sometimes be referred to as Capital Gains.
Your decision will depend on how much tax you are currently paying, how long until you think you will sell the fund, and what type of fund it is. We would recommend you consult with a tax professional to make the best decision for your specific situation.
How are CIFs Reported?
Again, this is something that you need to think about before investing in a CIF. Just like Individual Investment Accounts and Company Investment Accounts, CIFs can be reported on Schedule 3 of your income tax return (or Schedule 3F for a non-resident/non-Canadian).
The schedule will report all of the income and losses from your investment account. If you are reporting Deferred Income, then you don't have to report the value of your investments until the time that they are sold.
The main advantage of Deferred Income is that you don't have to pay tax on it until you sell the investment. However, if this sale occurs before you actually report the investment as income, then you will be required to pay tax on that income.
What is the Difference Between Mutual Funds and CIFs?
Mutual funds are a great way to diversify your investments – but only if they are well-diversified (or 'diversified' for short).
They are not suitable for those who want a simple solution to their portfolio management needs. Instead, you should consider investing in a CIF, which is often referred to as 'pooled investments' for the same reason.
An alternative approach would be to invest in segregated mutual funds – these are often referred to as 'separate account investments'. There really isn't much difference between them and pooled investments - you can use either one. On the whole, they are less expensive than pooled investments and they offer greater liquidity (so you can sell your shares any time without having to wait for a sale).
Is CIFs Right For You?
Why You Should Invest in a CIF: Lower Fees – since you are no longer buying or selling your shares on the secondary market, your costs will be lower than with other alternatives.
Since the CIF is a pool of assets, that means they are usually managed by specialists in asset management.
Why You Should Not Invest in a CIF:
A CIF won't be right for you if you don't like paying extra fees for investments.
A CIF may not be right for you if you specifically want to invest in large multinationals, but small businesses and new technology companies are more your things.
Although these accounts are very similar from an investment perspective, there is one key difference that investors need to be aware of - with a CIF, the fund will not pay dividends until it reaches maturity (that is, the time set by its terms). This can be 15 years or more from now – so as you can see, waiting is not always a bad thing.
