A World of Investments: The Collective Investment Scheme
THE HUSTLE AND BUSTLE OF THE CITY
On our way to an office to meet with a client during the week, my colleague and I had to drive through parts of the central business district of Accra, the capital city of Ghana. The time for the appointment was fast approaching. But whiles the traffic kept at a slow and boring pace I couldn’t ignore the energy of the people moving fast on the pavements, including those in the shops along the streets and the general buzz in the atmosphere which was captivating, real and irresistible!
There were lots of ongoing business activities - bargaining, buying, selling and negotiating for all sorts of things like clothes, shoes, stationery, onions, tomatoes, cooked food, roasted plantain, paints, building materials etc. with other goods being transported from one point to the other. There were different things on sale, including ongoing negotiations for good rates on foreign currency. From one block or street to the next, one could also count the various service institutions, especially telecom and financial, carefully positioned to partake in the various ongoing business activities. Vehicles were also parked, ready to transport passengers to destinations like Lome, Cotonou and Lagos, among other West African cities. Evidently, business is brisk. Both local and international trade is in full swing!
Interestingly, beneath the surface of all these trading activities within the hustle and bustle of the city’s market, which paints a beautiful picture of a colourful collage is a plethora of investments by, not least, individuals who have set up and own their businesses to buy and to sell, wholesale or retail, for a return, or you can call it profit!
“An investment vehicle is a product used by investors with the intention of gaining positive returns”, according Investopedia, the financial dictionary.
Once upon a time, the vehicles available for investments were few and also remained within the domain of institutions and high net worth individuals (HNWI). Bonds (fixed income), equities (shareholdings), business ownership (companies & enterprises) and real estate (brick & mortar) traditionally, were the broad categories. Nowadays, however, there have been other additions to the traditional mix called alternative investments.
Alternative investments, like Mutual Funds, provide features that are inclusive for all, easy to invest in with relatively small amounts, liquid hence easy to convert into cash and they seek to maximize the risk-return objective of the investor. Like Real Estate Investment Trust (REIT), they can invest into real estate on your behalf without necessarily requiring you to own the brick & mortar. And still some alternative investments will give you the opportunity to invest in Commodities without necessarily requiring you to own gold, crude oil or cocoa beans. And indeed, there are some which seek to help the investor to mitigate risk like Hedge Funds.
It is all about how these products or investment vehicles are put together (or tailored) and programmed (or structured) to meet the individual or institutional investor’s specific need for “gaining positive returns” so that you can receive regular income (as a possible objective).
Like the collage I painted, figuratively, in the introduction of this article about the buzz of business activity around some parts of the central business district of Accra, one alternative investment which catches the attention of many is Mutual Funds.
Mutual Funds fall under the group called collective investment schemes. They are mutual because you tend to team up with others who share similar investment objectives. They are collective because your Fund Manager will invest your pooled funds together in a collection (carefully selected mix) of investment vehicles (fixed income, shares, commercial paper, certificates of deposits etc.) with the view to maximizing and “gaining positive returns” on your investment.
Sourcing for investor funds to be pooled together and invested, professionally, into a mix of carefully selected vehicles will firstly, help to satisfy one key principle in finance and investments called diversification, literally saying “don’t put all your eggs in one basket”. That will help you to lower your risks. Secondly, the fund manager seeks to achieve what the economists’ refer to as “economies of scale” which, due to the relatively bigger size of funds expected to be pooled together and managed, also helps to lower the overall costs and hence inure to the benefits of all the investors (shareholders). Clearly, we are once again presented with the interrelationship between economics and finance, as was mentioned in my previous articles.
Usually, one reason people shy away or remain excluded from investments is the initial capital outlay or the amount required to start. Today, between GHS 10 and GHS 20 which can buy you roasted plantain and groundnuts and tilapia & banku with hot pepper, respectively, is all that you may require to begin the journey of investing in mutual funds. And again for the first timer or investor with a preference for liquidity (easy to convert to cash), you may want to try Mutual Funds which invest in short term investment vehicles which the finance people call “money market” Funds.
Again, because people feel that the funds they have available are not enough, they tend to keep them in savings. Generally, interests on savings account are unable to beat inflation at a current rate of about 15.4%. So right from the onset, the purchasing power (value) of your funds hidden in a saving account is eroded by inflation. Mutual Funds which invest in the money market seek to beat this risk for you by benchmarking the 91-day Treasury Bill (T-Bill) rate currently at about 16%. And because your funds are also invested in a collection of carefully selected investment vehicles with different, and higher return profiles than the T-Bill benchmark rate, the fund manager is able to beat the benchmark rate for you, plus a comfortable margin, all other things being equal.
Pricing for most Mutual Funds is transparent as it is calculated on a daily basis. The fund manager will quote the prevailing market price at which one can buy or sell. So for instance, if you buy a share in a mutual fund at GH 20 pesewas (twenty pesewas), and the price per share increases to GHS 1 (One Ghana Cedis) at the time of selling in a few months’ time, then your gain is the difference between GHS 1 and GH 20 pesewas which is GH 80 pesewas (eighty pesewas). Now, multiply this by the number of shares you own and excite yourself about how much positive gain (returns) you would have made on your investment!
It is thus not surprising that mutual funds, as alternative investments, seem to be growing in popularity in our part of the world especially among the previously unknown or the unexpected first time investor. This makes it inclusive for most, hence no more a preserve for the wealthy and sophisticated.
In our next article we will continue to aim at presenting, in simple language, other interesting features of mutual funds and why we consider them suitable for your consideration as part of your portfolio of investments.
Like the painting of the business owner referred to in the introduction of this article, you may also want to be a shareholder in a mutual fund (likened to setting up your own small business) buying and selling shares “with the intention of gaining positive returns”, or profit but without engaging yourself in the hustle and bustle of the city!
You can speak to us at Ideal Capital Partners Limited on how to invest into Mutual Funds as an alternative investment!
The writer, Peter Nii Odoi Charway, is the Head of Research & Strategy at Ideal Capital Partners Limited, a SEC regulated Investment and Asset Management firm located in East Legon, Accra.