Are investment clubs a good idea?
Investment clubs are formed when a group of individuals collectively pool their money to invest it. All the members of the group share the benefits of the investments. With collective investments, comes lower transaction cost. Moreover, these clubs are very easy to form, operate and maintain. The members often meet regularly to discuss existing or new investment opportunities.
Apart from monetary benefit, these clubs are an excellent way of networking with people who have similar interests. Moreover, these clubs are also a great source of learning. During club meetings, members often share their perspectives about markets or investments. Investment clubs often help people form valuable contacts that are often useful. Hence these clubs are considered to be very effective.
Why is it good to join a club?
Investment clubs have several advantages other than being a platform for investing collectively. Below are the advantages of investing in clubs.
Lower transactions costs
When money is pooled from multiple investors to do large transactions, the transactions costs are for each member is low. All the members enjoy a lower transaction cost.
Excellent mode of networking
Members with similar interests in investing often form a club. Regular meetings give investors of the club to communicate regularly.
Great source of learning
Members meet regularly to discuss existing investments and any opportunity for new investments. This improves the collective knowledge of the club as all the members share each other’s views and perspectives.
Sharing Profits and losses
All members share the profits and losses from the investments.
What is an investment club account?
An investment club is a self-managed group where people pool in their money and invest together. Every member can help in making investment decisions. Individuals who are not confident in investing solo can opt for an investment club. The club pools money from its members and invests them in a range of assets for their benefit.
Investment Club Account is an account created by a group of people who agree to share their investment in that account. The purpose is to increase the capital and the size of the investment. Additionally, the members share their investment advice and experience. All the investments are pooled under this account, and members meet regularly to discuss the investment and make decisions.
Some investment clubs have set criteria to guide their overall investment strategy. For instance, a club’s strategy can be to invest in established businesses with a good dividend track record. Or, to invest in small companies with fast growth potential.
Generally, to open an investment club account, an individual will have to pay an upfront payment to invest initially. In the future, they can pay a specific amount every month. The monthly amounts will be invested in the investment portfolio.
How do you start an investment club?
To start an investment club, one needs to identify the right people who will be interested in joining the club. The members must be willing to invest the amounts that will be pooled.
Following are simple steps that will help in starting an investment club:
Identify potential members for the club.
A club size of 10 to 15 is ideally to start with. Aiming at a very big group can make it difficult to manage and communicate with the members. While with a very small group, it might be challenging to pool in funds to invest.
Hold a meeting
Get together with all the people who are interested in and brief them about the club’s goals and plans. Explain the investment strategy, disclose the joining fee and monthly investment amount.
Understand the member’s interest level
Being part of an investment club is rewarding as well as risky. Understand if the members are willing to undertake the risk. All the members share both the risk and rewards. Therefore gauge the interest level of the member before signing up with them. Members have to be patient with their investment. For example, investors who panic with market fluctuations may be red flags for the club.
Hold an organisational meeting and finish the necessary paperwork.
Define and appoint people for necessary roles within the club. Incorporate a firm to conduct the investment club’s duties, to pool the money and invest together.
Open a bank account or brokerage account.
Choose the right broker who suits the needs of the clubs.
Design an educational agenda
Most clubs have members who are new to investing. All the members of the club might not have the same knowledge or understanding of the markets and investments. Therefore, conducting frequent educational programs will help the members understand the investment strategy better.
Research about potential investment
Ensure that all the club members do some research about potential assets to purchase for the investment portfolio. Their choice of assets must be backed by research. The group members can come together and vote for their favourite choice of the asset. And, determine the money to allocate to each of the assets.
Invest and Track
Once the assets are finalised, and money allocation is determined, take the plunge and invest. As the club continues to operate, keep evaluating old and new investments during the regular meetings. Make necessary decisions based on member opinions and market dynamics.
How do investment clubs make money?
An investment club is a self-managed group. People pool their money and invest it together. Each member of the group might help make investment decisions together. The club may hold educational meetings where the members study different potential investments and make investment decisions together. Buying and selling of investment may happen on a voting basis. All members of the club share the risk and rewards equally.
Usually, investment clubs are compared to mutual funds, which enable investors to pool their money together. However, there is no regulatory body that regulates these investment clubs. Therefore, before joining a club, it is important to know the members personally and have confidence in trusting them with the money.
Can an investment club be an LLC?
Investment clubs often form a legal partnership or a Limited Liability Partnership, or a Limited Liability Company (LLC) to invest in a single portfolio. However, the most common way of running an investment club is to form a general legal partnership. All the partners contribute capital in varying proportions. And each partner/member has an equal share in the profits and losses. And each partner will pay taxes on capital gains and dividends individually as per their share in the profits.