Collective investment trusts (CITs) pool investor funds into a single investment managed by a professional trustee. This specialized type of trust has fewer regulatory requirements, which typically cuts costs. But they are only available to certain investors, such as retirement plans and institutional investors, and not the general public. Here’s what you need to know.
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How a Collective Investment Trust Works
CITs can work like mutual funds in the sense that they pool assets from multiple investors and are managed according to a defined investment strategy. However, CITs are not overseen by the Securities and Exchange Commission (SEC). Instead, they fall under the regulatory authority of the Office of the Comptroller of the Currency (OCC) or state banking regulators. This difference in oversight can lead to fewer reporting requirements, which could reduce operational costs. And lower costs can result in lower fees for investors, making CITs a popular choice for large institutional investors such as pensions and 401(k) plans.
Pros of a Collective Investment Trust
- Lower fees: CITs typically have lower fees when compared with mutual funds, primarily due to their lighter regulatory burden. This cost efficiency is especially beneficial for large investors, allowing more of the investment returns to be retained by the participants.
- Greater flexibility: Trustees managing CITs can tailor the fund’s investments to meet the specific needs of the participating plans, which can lead to better alignment with the investor’s goals.
- Diversification: By pooling assets from multiple investors, CITs can invest in a broader range of securities than individual investors might achieve on their own. This diversification results in stability and a lower risk profile.
- Access to institutional-grade investments: CITs often have access to institutional-grade investments that provide opportunities for higher returns and more sophisticated investment strategies.
Cons of a Collective Investment Trust
- Limited transparency: CITs are not required to provide the same level of transparency as mutual funds. A lack of details about the trust’s holdings, performance and management practices can make it more challenging for investors to assess the trust’s overall risk and effectiveness.
- Restricted access: CITs are generally limited to qualified retirement plans and are not available to individual retail investors. This restriction reduces the accessibility of CITs, making them an option primarily for large institutional investors rather than the general public.
- Regulatory differences: While the lower regulatory standards for CITs often results in lower fees, it also means CITsmight not offer the same level of investor protection that other funds get from the SEC.
- Potential liquidity issues: CITs often have less liquidity during times of market stress. This can pose a challenge for investors who need to quickly access their funds or reallocate their investments.
When to Invest in a CIT Instead of a Mutual Fund
Investing in a CIT instead of a mutual fund can be a strategic decision, particularly for institutional investors or those managing large retirement plans. For large-scale investors, such as pension funds or 401(k) plans, the cost savings of a CIT can be significant, allowing more of the investment returns to be retained within the fund. Plus, CITs often have access to investments that are unavailable to individuals and mutual funds that offer potentially higher returns or more sophisticated investment strategies.
CITs also offer more leeway in tailoring investment approaches because of their loosened regulatory restraints. This flexibility can be particularly beneficial for plans with specific investment objectives that require a customized approach, such as incorporating environmental, social, and governance (ESG) investing.
Bottom Line
CITs can provide benefits for those managing large retirement plans or looking for a cost-effective way to diversify investments. This type of trust often has lower fees when compared with mutual funds due to reduced reporting requirements and oversight. They are typically available only to institutional investors, such as 401(k) and pension plans, which limits access for individual investors. CITs may also have less transparency in reporting holdings and performance. Before choosing a CIT, it is important to understand these factors and evaluate whether it aligns with your investment strategy and goals.
Tips for Investment Planning
- A financial advisor can help you determine which types of investments are a good fit for your portfolio. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to calculate how much your investments could grow over time, SmartAsset’s free calculator could help you get an estimate.
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