Financial planning involves a critical activity where one has to invest part of their income. The investment should be into assets and not liabilities (this is covered in another edition). As part of investing in assets, mutual funds stand as a good asset class. As such, this article briefly looks at investing in mutual funds in Ghana.
Ghana is home to over 30 mutual funds. The mutual fund space is regulated by the Securities and Exchange Commission (SEC). SEC ensures investment managers play well within the rules of the game. For instance, in 2018, SEC instructed all investment companies to refrain from providing investments in fixed income to investors. However, not all investment managers have launched mutual funds.
What is Mutual Funds
A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as equities, bonds, money market instruments and other assets (investopedia.com).
By the definition, first it is a pool of money collected from many investors (you and me). Secondly, the pool of money is to invest in securities like equities, bonds, money market and other assets. Alternative names are shares of companies (equities), government instruments treasury bills (less than one year in duration) and bonds (more than one year in duration), fixed deposits by banks.
Why can’t the individual investor just walk up directly to the institutions (issuers) who sell these assets and invest with them? Of course, individuals are able to walk to banks easily to do fixed deposits and treasury bills. However, the mutual funds gives some advantages which would usually, not be available to the single investor if they go directly to the issuer.
The mutual fund is managed by professional investment managers. In Ghana, they are regulated by the Securities and Exchange Commission (SEC). The managers know the market and where they can best place your funds. They have the capability to research more into the issuers, their assets and ultimately, performance. This capability the individual investor may not have.
Diversification at lower cost
Diversification is key in investments. It simply means minimizing your risk of losses by placing your investments in different assets. It will cost the individual investor more time and money going from bank to bank investing in fixed deposits and T-bills. Likewise, to seek for the services of a broker for stocks and other more complex instruments.
Access to assets at a higher return
Issuers would commit to a higher level of returns depending on the size of the investment. As an individual investor you may not be able to raise enough principal to bargain for higher rates under the stated acceptable risk.
Selecting a Mutual Fund
As we know the benefits of investing in a mutual fund, it is time to make your decision and choice of which to invest fund to invest in.
Credibility and Standing of the Fund Manager
Recent happenings in the industry has cemented the need for investors to do a good background check of the manager before investing. Firstly, SEC’s office could be a source of information. Currently the regulator has placed a list of managers who may not have fully complied with regulations. Some of the managers of mutual funds in Ghana have had their own difficulties. Therefore, investors should find other informal ways to get that information. Other factors like owners of fund managers, their lifestyles, how employees are treated are all helpful information to help in making the decision.
Objectives of the Fund
Every investment has an objective. You, the investor, should also have an objective. For example, do you intend to grow your principle and accumulate wealth over a long term, like retirement, or you intend to do place funds and glean off the proceeds periodically? The former would serve the investor as a capital growth or accumulation investment while the latter would serve as an income investment. The scope of the article may not be able to cover all. However, the essence of this section is to ensure that you match your investment objective with that of the mutual fund in Ghana.
Risk Profile of Investor
Every fund carries its own risk level and so is the investor who has their own risk tolerance. In measuring your own risk ask yourself how much you are ready to lose to make a certain level of return. The risk profile of a portfolio depends on the class of assets the manager invests in. The mantra holds true that the higher the risk the higher the returns and vice versa. For example, if the manager invests more in equity (shares), the risk profile would be higher. The returns could also be higher but investor should also be ready for some interim losses before the cumulative positive (or negative) gains over the term of investment. You should ask the right questions on this to be able to gauge your own risk profile with the fund.
Each manager has its own fee level for their mutual fund. However, the law governing mutual funds permits managers not to charge anything more than 2.5% of assets under management (AUM). Whatever charges related to managing of the fund would be translated to the investor. Therefore, the investor should consider charges as one of the criteria for investing in a mutual fund. Most of all go for value.
All the other factors mentioned earlier could be well clarified if you seek advice. The recent developments in Ghana’s financial space has made financial advice highly necessary. You could get a list of advisors on SEC’s website. Make the effort to read the prospectus. This is the document which contains all the information of the fund. You need to get an information from another source apart from what the investment house would give you. The time of investing without advice is over! Seek advise even if it requires paying for service.
Whatever happens, invest. Include mutual funds in Ghana as part of your investments for all the benefits. It has proven to be a potent option for both wealth accumulation and income generation.
NB: This is our own way to help in investment literacy. It does not constitute an investment advice. You should seek further advice before you invest your money.