A collective investment scheme is an approach to investing in a given project that involves multiple participants. The idea behind this type of investment approach is to maximize the return by involving more people in the initial scheme. As a result, the combined resources of the participants make it possible to acquire a larger portion of the investment, thus generating more return that is distributed accordingly among the group of investors.
One example of a collective investment scheme is the purchase of property, with an eye for reselling the property after improvements are made. While a project of this type may be beyond the means of an individual investor, creating a collaborative effort with three or four other investors makes it possible to purchase the property without undue financial hardship on any of the partners. Once the property is purchased and the improvements made, the property is placed back on the market at a price that covers all expenses, plus a little more. Once the property sells, each investor recoups his or her investment, plus makes some type of profit on the deal.
It is also possible to use a collective investment scheme to make money with stocks, bonds, and other types of securities. Forming a collective allows individual investors to pool resources and participate in investments that none of them could manage on their own. This arrangement is sometimes used by employers to fund retirement plans, with the collected funds used to purchase investments that ultimately appreciate in value and thus provide a decent return for each of the participants in the plan.
Investors may or may not be involved in the day to day operation of a collective investment scheme. In situations where the scheme is created for a short-term arrangement, such as the purchase and resale of property, there is a good chance that all parties will remain involved in the process. When the scheme is used to purchase shares of stock and similar securities, there is usually a central party that manages the scheme for investors, with that entity providing periodic reports on how those investments are performing.
The underlying benefit of a collective investment scheme is that people who would otherwise not be financially able to participate in a particular investment opportunity can pool their resources with other investors and take advantage of the opportunity. While there is some degree of risk involved, investors in this type of scheme share that risk with the other participants, just as they ultimately share the benefits from the investment with the other members of the collective.