Nobel Prize-winning economist Harry Markowitz said “a good portfolio is more than a list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”
In his theory of risk/return maximisation and portfolio optimisation model, various indications are provided that assist investors in selecting the most efficient portfolio by analysing various possible selections of securities.
Investors either keenly follow options and markets to make pertinent and swift decisions in trading their investments and reallocating resources to hopefully make gains.
Alternatively individuals can hire expertise of money market professionals to do this for them. This is where Mutual Funds are a hot topic. Globally, as of 2020- there are almost 126,500 such funds, mostly across Europe and Asia, and significant growth of the same across Africa.
A mutual fund is a single, large, and professionally managed investment organisation that pools the savings of individuals to invest. After carefully studying the market and the companies, fund managers invest in corporate securities. It is a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities.
Most mutual funds fall into one of these categories; stocks, bonds, money markets, and target-date funds. Returns generated out of such investments, after charging fees of portfolio managers, are distributed among the investors.
Mutual funds serve as a link between investors and the securities market by mobilising the savings from the investors and investing them in the securities market to generate returns. The allure is great as they offer individuals an opportunity to invest in a diversified portfolio despite having fewer funds. These products also offer investors services of good research teams, along with transparency. Therefore it is a more suitable form of investment for a common man.
Features of this investment tool act as their benefit. Mutual funds are non-depository or non-banking financial intermediaries. They act to mobilise savings from investors towards a mix of corporate and government securities.
This is done while offering a variety of securities within the reach of the most modest investors. Mutual funds in Kenya are controlled and regulated by the Capital Markets Authority whereby they provide licenses to fund managers and are, therefore, considered to be safe.
Usually, they are seen as an indirect form of investment as people invest in mutual funds which in turn invest in shares, bonds, debentures, and other securities in the capital market, therefore working as the representative of the investors.
The process of investment is made simple, accessible, and affordable. Management of mutual funds is undertaken by professionals who have the requisite skills and experience to analyse the performance and prospects of various companies. They provide continuous supervision and analysis, investment consultancy, judicious investment decisions, and expert experienced professional services at affordable costs.
Investors with limited funds may find it difficult to diversify their investments as individuals, however, investing in such products enables them to achieve diversification in the selection of portfolios by investing in a number of companies across various industries and sectors. This diversification ultimately reduces the risk factor of the investment.
As compared with investing directly in the capital market, investments through mutual funds are less expensive as the benefit of economies of scale takes place and ultimately this saving should go to the investors. Mutual fund investment provides transparency to the investors. Every month, fund management declares their portfolio. With the help of this information, investors are able to know whether their money is being deployed.
In case any investors are not happy with the portfolio they can withdraw their money at a short notice as the funds have great liquidity. With different types of schemes, investors have the flexibility to make a choice among them or even have the option to transfer the money from one scheme to the other.
On the downside, some mutual fund companies in Kenya have high conservatism where information release is concerned, particularly of the voluntary and unregulated nature. Mr Njehu invested in a renowned and well-advertised mutual fund. The organisation has thousands of clients investing through their various fund products. Each product’s investment is a mix of treasury bonds, equities, fixed deposits, and cash yielding a certain approximate percentage return. In the half-year and annual “fact sheets” given to the clients, the fund managers seem to have incorrect or intentionally omitted disclosing the investment income as the total investment amounts by the organisation are indicated in percentages and not monetary figures. The diagrams and pie charts showing percentages earned via bonds, equities, and others do not indicate vital information such as, how much in monetary terms have they earned and the breakdown.
There should also be full disclosure of monetary figures invested in various investment options, this should be in currency and not just percentages. As for equities, there should be disclosures of which NSE listed companies and how many shares in each of those companies are in the mutual fund portfolio, also, exactly how much dividend was earned from each of those listed companies. Full transparency should be encouraged by management. Most individuals feel the fees are high, assume there is tax inefficiency, poor trade execution, and the potential for management abuses.
What is needed in Kenya where mutual funds are concerned? Compulsory and standardised reporting, central collation, and public dissemination of information should be encouraged, heightened investor education/awareness, increased competition through allowing additional players/products, and increased capacity and effectiveness of regulators
. There are various money market investment options in Kenya that are lucrative and mutual funds could be considered as one of the options to be added into the portfolio together with direct investments in government bonds, purchasing underpriced high yield stocks of blue-chip companies listed on the NSE, and property investments. At the end of the day, despite the professional advice, each investor should invest their hard earned money where they feel most comfortable.
Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honor. [email protected]
