Mutual funds are collective investment schemes. This type of investment instrument or product pools resources from investors referred to as shareholders for investment in a financial product. As the name suggests, several individuals, groups, or institutions will constitute the shareholders of the Fund. Mutual funds, therefore, engage in investing activities on behalf of their shareholders. The Fund’s investments could include equities, bonds, fixed income products, other money market products, properties, derivatives, commodities, etc. What is implied here is that, every mutual fund has objectives underlying it.
Mutual Funds Set-up
In Ghana, mutual funds are set up by Fund Management Companies licensed by the Securities and Exchange Commission of Ghana (SEC). All mutual funds in Ghana thus have a Fund Manager as their promoter. A reason why we would have observed that several of the funds in Ghana have the Fund Managers’ name preceding it, for example, OctaneDC Money Market Fund. Mutual funds are limited by shares and its assets and liabilities are assigned to its shareholders as a public limited company (PLC). Mutual funds, therefore, belong to its shareholders and we must be concerned about its management where we are shareholders in a particular Fund.
Governance and Management
As a PLC, the Fund has its Board of Directors. Per regulations, mutual funds must have a minimum of three independent directors. The Board can add on additional directors such as executive directors from the fund manager, and also appoint some more independent directors. Also, the Fund is supported by service providers, which includes but is not limited to a Fund Manager, who provides both fund management and administration duties in most instances, and a Custodian, which is a Bank. The Fund is also supported by a Company Secretary, a Legal Counsel, and an Auditor. The Board is also aided by committees which may include: Risk, Compliance, Investments, Compensation, Audit, etc. Daily, the Fund is managed by a team provided by the Fund Management Company. These include a Fund Manager, an investment analyst, a research analyst, a compliance officer, and an Accountant.
Mutual Funds hold assets. In most cases diversified assets. All the assets in the Fund were acquired at different dates and costs. All the assets gain or loose at different points in their lifetime. As a basket of assets, an average price must be arrived at through valuation. The price is important for a new investor to buy into the fund or an existing shareholder to buy more of the fund or an existing shareholder to exit from the fund. Let us note, depending on the type of the fund, these prices could be done daily, weekly, monthly, etc. The price helps in computing the yield or the return on the Fund. This is an interest area for most of us, as the yield remains an important reference point for us in deciding which Fund to buy into or which not to buy.
An important point here is that our return on our investments is time-bound. The implication here is that, if we buy into a Fund, halfway into the year, our expected returns could be half, less, or more of the yield that attracted us to the Fund. It is also important to note that, the technicalities in valuation and pricing differ from Fund to Fund, as every Fund is valued based on its underlying assets.
Licensed Mutual Funds in Ghana
So far, we have five major categories of mutual funds in Ghana. These include Equity Funds, Money Market Funds, Fixed Income Funds, Balanced Funds, and REIT. In all, there are 46 mutual funds in Ghana (www.sec.gov.gh; 2nd Quarter Market Report – Apr-June, 2020).
What are their unique features?
Equity Funds: Equity funds hold investments in other companies. These could be listed companies on regulated exchanges or unlisted companies. Some of the unlisted companies could be on the, Over the Counter ‘OTC’ market, through Private Equity investments or direct investments in public companies. The most important reference here is that all these equity investments must be in businesses that can be easily valued. Shareholders in equity funds enjoy dividends and capital gains/losses.
Money Market Funds: MMFs hold financial instruments that are traded on the money market. The asset selections could include products of less than one year of maturity. The main advantage of investing in a money market fund is that the Fund is near liquid and a shareholder could exit the fund by given short notice. Shareholders in a money market fund enjoy interest and preservation of capital.
Fixed Income Funds: This is akin to money market funds. However, fixed-income funds invest in long-dated money market instruments of maturity of more than one year. Shareholders need to provide advanced notice of exit from this Fund. Shareholders enjoy interest and preservation of capital in a fixed income fund.
Balanced Funds: Balanced Fund seeks balance across assets. A balanced fund could therefore hold equities, money market instruments, fixed income instruments, REITs, etc. In this Fund, shareholders enjoy a mix of dividends, interest, capital gains, or capital losses.
REIT – Real Estate Investment Trust: REITs hold properties as part of the portfolio’s assets. These could include residential, commercial properties, and lands. Shareholders in REITs enjoy part of the share of income, capital gains/losses in property investing.
The mutual funds business in Ghana is an active market with several stakeholders.
Some pros of buying into a Mutual Fund
Professional portfolio management – as a shareholder, you will have dedication to the Fund by a Fund Manager, who is a licensed investment representative, managing your Fund. The fees attributable to this service by a professional are equally distributed across the shareholdings of all shareholders in the Fund. Therefore, as an investor, you do not solely bear this cost.
Safety of investment – the structure of mutual funds brings together many stakeholders who are dedicated to ensuring the safety of your investments. These include but are not limited to the Regulator, the Board, the Fund Manager, the Administrator, the Custodian, the Auditor, and several shareholders. Mutual funds hold Annual General Meetings. A forum that allows shareholders to enquire into the operations of the company.
Portfolio diversification – a way to maximize our returns and minimize our risk in a portfolio is through diversification. Mutual Funds achieve diversification effortlessly due to the size of the Fund. As in individual investors, this effort could take a longer time to be realized. The result is an excessive delay in ensuring significant returns on our investments.
The convenience of entry and exit – mutual funds transactions are now on our mobile phones. You buy into a Fund with ease and redemptions are not complicated. Also, the cost of entry is minimal as several of the Funds in Ghana have a minimum purchase price of GHS50. Also, the Fund remains highly liquid as several of them are open-ended.
Enhanced investment discipline – if we have been wondering if we needed a lot of money to start investing; if we have been wondering if there is a financial product that allows regular top-ups; then a Mutual fund is our answer. Mutual funds allow ease of purchase as frequently as we may wish. Most importantly, we achieve an enhanced financial discipline.
Some cons of buying into a Mutual Fund
Indirect ownership of investment – some people stay away from mutual funds because they will like to have direct ownership of their investments. In their words, ‘I do not want to share my investments with others’. As a shareholder in mutual funds, you do not have direct ownership of any of the assets of the Fund. All you can claim are the number of shares you hold.
Entry and Exit cost – all mutual funds have fee structures. Depending on the type and objective of the Fund, some funds have front load fees and others have back-end fees. A shareholder who is not paying attention to such fees could loose out and this could even impact your principal invested in the Fund.
Poor investment decisions of the Fund Manager – as a shareholder, you do not influence the investment decisions of the Fund Manager. The Fund Manager is guided by investment guidelines drawn out of the investment policy statements of the Fund. Anything can go wrong with an investment decision by the Fund Manager.
Management Abuse –Mutual funds are promoted by fund managers. Where there is abuse as a promoter or damage to the authority or brand of the fund manager, the Fund suffers. Once a mutual begins to have an image tag, the Fund is unable to grow. All or some of the shareholders could begin to demand redemption at the same time. With a run on the Fund, shareholders suffer severe losses.
For Kwame who is risk-averse; for Kwame who is now beginning his investment journey; for Kwame who can afford monthly contributions towards an investment, I will recommend mutual funds
For Ms. Elizabeth who can afford to take medium risk; for Ms. Elizabeth who has less than GHS100,000; for Ms. Elizabeth who is looking for an instrument that will allow regular top-ups as and when, I will recommend mutual funds.
“Mutual Funds offers safety and diversification; Mutual Funds are created to make investing easy; Mutual Funds spares you the burden of picking individual financial assets” (Ron Chernow, Scott Cook).