COLLECTIVE INVESTMENT SCHEMES
4/7/2011 9:30:04 PM -
What are collective investment schemes?
Mutual funds and unit trusts
Mutual funds are collective investment schemes that are mostly managed by professionals for their unit holders. Mutual funds often have different classes of assets pulled together by many different investors. The fund managers buy and sell large quantities of shares and get preferential treatment on trade commissions. Operating mutual funds requires professional knowledge and expertise and are regulated by the Securities and Exchange Commission for investor protection. This type of investment is very liquid since investors can redeem their investment upon request at the net asset value per share. Like corporations, mutual funds have boards of directors to oversee fund management and the boards appoint registered investment advisers for its portfolio management.
Professional fund managers have the expertise and resources to perform in-depth analysis for all investments made. This type of investment is well managed and well diversified to reduce the risk and maximize return. In Ghana, Databank financial Services have different mutual funds like the Balanced Fund, Ark Fund, EPACK amongst other well performing funds. IC Securities has the Capital Growth Fund. National Trust Holding Company has the horizon fund, Goldcoast Securities has the Gold Fund, and the Ecobank Development Corporation has the iFUND amongst others. HFC Investment Service has the following managed funds, HFC REIT, HFC Equity Fund, HFC Unit Trust and HFC Future Plan Trust.
ROLES OF GOVERNING BODIES IN THE SECURITIES INDUSTRY
Securities and Exchange Commission (SEC)
• Overseeing and regulating the fund management industry in Ghana and administering the securities laws affecting Collective Investment Schemes such as Unit trusts and Mutual funds
• Overseeing the disclosure of material information to the investing public by companies, including securities listed on the Ghana Stock Exchange
• Performing post prospectus checks on the utilization of funds collected through public subscriptions.
• Investigating any breaches of the securities laws and the Companies Code
Ghana Stock Exchange (GSE)
• To regulate the dealings of members with their clients and other members
• To co-ordinate the stock dealing activities of members and facilitate the exchange of information including prices of securities listed for their mutual advantages and for the benefit of their clients;
• To co-operate with associations of stockbrokers and Stock Exchanges in other countries, and to obtain and make available to members information and facilities likely to be useful to them or to their clients.
Auditors: According to SEC regulations, all registered investment schemes are by law required to have an independent auditor whose responsibility is to ascertain the truth in the figures or returns quoted by the fund managers. Most investment schemes have auditors who can be internal and external but SEC places much emphasis on the external auditors.Independent Trustees: unit holders have the protection of independent trustees in whom the assets of the scheme will be vested and who shall exercise supervisory duties as stated in the Trust Deed. It is often the responsibility of the trustee to ensure the scheme is effectively managed for the benefit of unit holders.
Why should you invest in collective investment schemes?
Little problem with liquidity: It required of the fund managers to buy back units on demand of the unit holders and thus providing a high liquidity to its investors. This high liquidity of the collective investment scheme is done through redemptions at a value known as Net Asset Value per share.
Managed by professional fund managers: Most often, these schemes are managed by professionals with the requisite education and experience in the operations of the capital market and can easily take informed investment decision for unit holders. This professional fund manager's role will save the investor the hustle of selecting and managing his own portfolio so that he conveniently concentrate on his job.
Less risky as compared to shares: Most often, shares have a higher return and a higher risk but with collective investment schemes, your portfolio is well diversified and the risk of losing a portion of your money is very low. SEC encourages fund allocation of these schemes in the money market. With collective investment schemes, you can achieve a higher return with a relatively low risk.
It is well diversified: Funds from unit holders are often invested in a wide range of listed companies across the spectrum of the economy. This spread of asset lowers the risk of the scheme and maximizes return.
Transparency: the activities of SEC, external auditors and trustees compel fund managers to be transparent as possible to avoid fraud and ensure investor protection.
No exit charges: most of the collective investment schemes in the Ghanaian market have no exit charges.
Tax exemptions: the returns from investment in collective investment schemes are tax exempted in Ghana.
What are the risks associated with these schemes?
Market risk: this type of risk is the volatility in the prices of securities due to changes in the financial market. Collective investment schemes have less risk and greater return than the treasury bills. As rewarding as it is, it comes with some form of risk but often minimal. If you can remember, investors of EPACK and HFC Equity trust made a lot of losses during 2008 and 2009 because of the effect of the credit crunch and the bearish nature of the Ghanaian capital market. The above funds have a higher allocation in the capital market and that reflected in the performance of the fund. Thanks to God the returns of the funds have picked up and the stock market is doing quite well now.
Interest rate risk: this risk is the effect of interest rate fluctuations that can affect the current income of the Trust. This kind of risk is inherent schemes that have a greater portion of their allocation in fixed income securities.
Macroeconomic instability: Poor economic management can have an adverse impact on the scheme's performance and the value of the fund as well.
Now that you know what collective investment schemes are, make use of this information and increase your chance of gaining financial independence. Direct all questions, suggestions and comments to [email protected] or [email protected] and http://skafuiteye.blogspot.com/
©, Sophia Kafui Teye