Lead image for Collective investment scheme rules: what investors need to know.
The growth of collective investment schemes (CISs) or unit trusts in the past 10 years has been phenomenal. It has played a key role in mobilising funds to support the economy.
The legacy 2001 CIS regulatory framework was overhauled, giving way to the Capital Markets (CIS) Regulations, 2023 and the Capital Markets (Alternative Investment Funds) Regulations, 2023.
The structure of a CIS includes a fund manager, a trustee and custodian. A money market fund is a CIS authorised to invest in highly liquid financial assets, specifically in interest-earning money market instruments which have a maximum weighted average tenure of 18 months. These include Treasury bonds and bills and call and fixed deposits in banks and other licensed deposit taking institutions.
Since authorised investments in money market funds are ubiquitous, the money market funds are comparable. This principle applies to funds in the same category.
Whereas the regulations prescribe the asset classes money market funds may invest in, there is no such specificity in relation to special funds. However, the regulations prescribe broad investment guidelines which include concentration limits and minimum amount per client of Sh100,000.
The investment strategy and fund allocation criteria of each special fund is defined in the information memorandum (IM) and the investment policy statement.
It is important for the investor to seek to understand the focus of the special fund and its risk profile by studying its IM and other disclosures.
The regulations governing the alternative investment funds (AIFs) are less prescriptive. Here, the fund manager enjoys a wider discretion in the design of the investment strategy, purpose and method. These details are contained in the placement memorandum, which should only be privately placed to not more than 100 investors.