Collective Investment Schemes
You may want to go through the intro to the basics of investments that lead us to this particular investment vehicle; covered in this article https://medium.com/jipange/collective-investment-schemes-preface-ce6dd5d2c0e0. Otherwise feel free to read on!
A Collective Investment Scheme is an investment vehicle (usually called a fund) that pools funds from many investors and invests them in bonds, shares, deposits and other instruments in the market. Each Collective Investment Scheme must be licensed by the Capital Markets Authority in Kenya, and their operation is governed by The Capital Markets (collective investment schemes) regulations, 2001.
The regulations stipulate very clear processes to protect investors who put their money in collective investment schemes including: appointment of a licensed fund manager to invest the funds and manage the portfolio of assets; appointment of a trustee to oversee and ensure the fund manager follows their approved procedure for investing and administration; and lastly appointment of a custodian to hold the actual assets that have been invested in. So basically, your investment in a collective investment scheme is not giving your money to an unknowledgeable Chama treasurer who runs away with your money claiming the ‘market has fallen’ — this is a well-regulated investment segment!
Unit trusts are the most common types of collective investment scheme in Kenya and in other markets are also referred to as open-ended funds, because they will always accept more cash from investors — they just become bigger to accommodate the demand. On the flip side, if there are more sellers than buyers, the fund will become smaller. This is because it is structured as a company, that can create shares for new investors and which will buy shares back from an investor if they wish to sell. The price of a fund always reflects the value of its holdings. When more investors want to buy into the fund than sell, the manager issues more units. When the opposite is true, the manager cancels units.
So finally, you can buy bonds, and shares, and more, combining your funds with others and you can access these markets! Fantastic! It gets better:
- You don’t have to do the market research, actively time the market to buy those shares when the price has fallen, or run complicated projections to determine the intrinsic value of the share (what’s that actually?). The Fund Manager does all that for you, at a small fee of course, but because you are many in the fund — the fee is small for that amount of work
- You can invest small amounts easily — instead of investing multiples of 50K to buy into a bond, you can buy into the fund with amounts as small as 2K, and still get what the same yield as the bond holder (less the fund’s management fees). Cool!
- Even better, you can get out easily i.e. after some time you can liquidate and get full cash for your investments. If you had bought into shares or a bond, that may not be as easy. Better yet, you can add more money midway! Every month, every two months… Beware of the lock — in period though; some funds require at least a month or so lock-in before one can l.
- The process of investing and collecting returns on bonds, stocks, T-Bills is onerous, for example — maintaining an account at Central Bank for Treasury Bills is very time consuming, and opening it just takes over a month. Continuous participation in the weekly Treasury Bill auctions would also be onerous. Imagine following up on dividends for your favorite 10 shares! What about attending AGM’s? With Unit Trusts, sit back, and let the fund manager deal with heckling and distraught shareholders at the AGM! Continue with your day job, the money is handled.
- The ability to negotiate better interest/returns: An individual investing KES 50K has much less negotiating power than one investing KES 1Bn. A collective investment scheme offers just that — an ability to participate, with others, in an investment vehicle that can negotiate better than many individuals with small amounts.
Ok! Ok! We get it, but I don’t like shares — I think I am ok with Treasury Bills! I can’t afford to lose my Kids’ school fees if I invest in shares and the markets tumble kaput!! Good for all of you, there are varied options in the market:
- Money Market Funds: This type of Unit Trust invests only in short term money market instruments like Treasury Bills, Short Term Bonds, Commercial Paper and Bank Deposits. It preserves your capital and earns you income/yield on that capital. For Example: if you buy 100,000 units at KES 1 each, and the yield is 10% p.a., every month you get 10%/12 * 100,000 = 833. Your 100K remains intact, and you could reinvest the 833 and earn more in subsequent months because of the compounding effect. Risk Profile here is CONSERVATIVE — Low Risk investor who would like a safe parking space for their funds.
- Equity Funds: The investments for this unit trusts are made in the equities market — local and foreign shares, in a mix determined and disclosed by the fund manager. This fund is intended for the high — risk investor, risk profile — AGGRESSIVE. The fund invests in shares listed on a Stock exchange and is thus subject to the volatility of the market and company performance. Clients are advised to invest for at least five years if they are seeking to attain capital growth through investing in this fund
- Bond Fund: Investments are made in Bonds — Treasury and Corporate, and some funds have an offshore element. This is a safe and conservative investment — provides a reliable stream of income for saving long term when you don’t want to put your money at risk
- Balanced Fund: Funds are invested in a mix of equities, bonds, treasury bills and cash. Due to the diversified nature of the fund, this offers medium risk profile — MODERATE.
Usually there is a bid-offer spread for all funds except the money market fund i.e. you can buy at a price X, and sell at a price X-Y, where Y is the spread, at any point in time. Therefore, you want to buy at X, hold/accumulate for some period say medium to long term for equity and balanced funds, and eventually redeem at a price that will be X (1+ Yield), where Yield is the growth in the value of the units in the fund.
Licensed Unit Trusts in Kenya include the below (many more others down that Newspaper page), and their prices/yields are posted daily. Reach out to the respective Fund Managers and buy, buy, buy! All the best! And remember that interest earned via Money Market Funds attracts Withholding Tax at 15%; but the fund manager will deduct before giving you your interest 😊
