Business News of Tuesday, 13 November 2012

Source: Godwin-Xavier Ayeebo

Financial Literacy For All-Mutual Funds In Ghana

“Today millions of people have their fingers crossed, hoping the Dow keeps climbing. This is not investing. This is gambling. Betting your future on the ups and downs of any market is risky, very risky.”

Like I always do, I do not give advice. I give you financial education and then you make the choice yourself.

A mutual fund is a “type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment vehicles that are regulated, available to the general public and open-ended in nature. Hedge funds are not considered a type of mutual fund”

Another definition says a mutual is “An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus”

We live in a global village. Today, what is happening in South America, Asia, etc is watched live in all parts of the world.

In the world of finance and investing, innovative investment products and current news of global financial and economic issues are also streaming live every minute from all parts of the earth. It is therefore, very easy for people to try to adopt or even mimic, and imitate the origins of some ideas, skills, products, services created by some people some where else in the world, so they too could create something similar .

Today in Ghana, there are a number of mutual funds and unit trusts running in the Ghanaian economy.

Those, that have been reading my writings, would recollect what I wrote under the topic “Financial Literacy for All-Portfolio Income” which you can read from my blog through this link
In this write-up, I am going to discuss some great features about mutual funds including the advantages and disadvantages.

Warren Buffet said “The dumbest reason in the world to buy a stock is because it’s going up”.
The stock exchange market experts say that the Ghanaian Stock Exchange Market is one the best performing markets in Africa and I believe it is because of this confidence in the Ghanaian Stock Exchange market that encouraged a number of companies especially foreign companies, like Tullow Plc to list in the Ghanaian Stock Exchange, though there are many other reasons for listing.
Mutual funds are mostly shares bought bits on behalf of individuals, mostly small investors from companies, especially listed companies on various stock exchange markets in the world. At least, they make us believe the stocks/shares are bought from various stocks/shares from companies in different industries and for that matter these funds are well-diversified.

Few years ago, there were no mutual funds in Ghana, till one was established and since then there have been a number of them now operating in Ghana. Their operations and activities are being regulated by the Ghana Stock and Exchange Commission and the Ghana Stock Exchange.

Like in all deals, prospective investors are always asked to invest in mutual funds without much education to you. Where some education comes, it is from the seller, who is actually is not going to be truthful and objective. Surely, the seller’s education would be one sided geared towards his/her interest and gains.
When one buys mutual funds especially for retirement and capital gain purposes, one is doing what some experts call “Buy, hold and pray”. The likelihood that price will go up for one to sell and make more cannot be guaranteed by one. The determination of the price down or up is beyond one’s control because world economic factors and many others, some of them being genuine factors would be beyond one’s control.

Mutual funds in Ghana just like in many countries have these:

• One can invest with small one amounts of money, say Ghc5.00 and build on it for the short, medium or long term. Little drops make mighty financial wealth.
• Mutual funds accumulate pool of funds for massive investments in other sectors of the economy.

• One can just go to any of the main banks affiliated with these mutual funds companies to deposit cash that would be used to buy the fund for one.

• One can get substantial gains since it is not like a say, Treasury Bill (T-Bill) where one’s principal amount remains intact irrespective of what happens. Mutual funds depend on the ups and downs of the stock exchange market(s). It is a high risk investment scheme that can also give very high returns.

• Mutual funds can give you great capital gains, (capital gain is the increase in value of your investment, say, it was Ghc10.00 but now it’s Gh15.00, the increase of Ghc5.00 is the capital gain) maybe for your retirement or other purpose.

• One can download some of the application forms from the internet in the comfort of one’s office, fill and apply online.

• One can buy some fund in trust for one’s under age child just like other paper assets.

• In some mutual fund companies, a bank is situated, so one can just cash one’s redemption or deposit cash for purchases of some fund. This enables easy business transactions.

• Mutual funds are being regulated by the Ghana Exchange Commission and the Ghana Stock Exchange.

• No real taxes paid on capital gains on mutual funds in Ghana as at now but taxes are paid on capital gains on mutual funds in other countries.

• One can easily sell one’s funds and get back one’s money.

Now, let’s consider some great disadvantages:

• Huge fees are being charged by these mutual fund companies. Some of the fees are even charged at the time a fund is purchased for you. There one mutual fund company in Ghana that charges between 2% to 3% on redemption (redemption means, you selling part or all of your shares or fund, i.e. you taking back your money with or without gains) depending on the numbers of years your fund has been with them. Two percent (2%) is a very significant figure yet; this is how much they charge you for giving them your money to take care of for you. There is a saying that the mutual fund companies put up 20% of the money but make 80% of the profit. This means the investor, like you earn the smaller part compared to what the fund managers make for their companies, because commissions and other charges are never fully disclosed.

• One can lose almost all one’s money, since it is not like a say, Treasury Bill (T-Bill) where one’s principal amount remains intact irrespective of what happens. Mutual funds depend on the ups and downs of the stock exchange market(s). It is a high risk investment scheme that is why one can lose all one’s money. The principal amount is keeps moving up and down.

• Mutual funds do not give steady cash flow. You get capital gains if you are lucky.

• When one buys mutual funds, one has no more control over one’s money. Your money is now in the hands of people who are financially educated and they determine the price to buy for you and to sell the shares for you. You do not have a say or decision in the prices quoted for the fund. You cannot protect your own money. Where there is little control or no control, risk is very high.

• In some mutual fund companies in Ghana, when one wants to sell one’s fund, one cannot get one’s money that very day. With some, one even needs to have a current account with a bank, because, they would give you a cheque to pay in and cash it later or they open the cheque for you to go to their custodian bank with long queues and spend the rest of the day there. Why can’t investors get their money the same day?

• Some mutual fund companies charge great amounts even statements requested.

• When you buy mutual funds, you are just buying common shares or stock and these cannot make you a selling shareholder or an inside investor or even the ultimate investor. Selling shareholders sell shares to buying shareholders. Selling shareholders are the real owners (inside investors), who make a great deal of the money. Ultimate investors set up companies and take these companies public by floating shares.

• Research has shown that mutual funds do not have consistent performance. Basically, they are off and on. Good past performance does not guarantee a bright future at all. Many investors in mutual funds have taken decisions that will have great impact on their financial future.

• Mutual funds are claimed to be well-diversified, meaning that because the shares are bought from indifferent companies in different industries, turbulence in one industry cannot necessary affect that of other industries. The mutual funds experts say “don’t put all your eggs in one basket” but they have forgotten that they all eggs but not mixed with some gold bars in the basket. They have also forgotten that, if not all eggs in one basket, then it really means, it’s not good to have all one’s investments in one market controlled by that same market.(i.e. the basket) Warren Buffet said “Diversification is protection against ignorance”
In my advanced financial management studies, I know markets have systematic risks and unsystematic risks.
The Investopedia explains 'Systematic Risk' as “Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security.
Systematic risk can be mitigated only by being hedged. Even a portfolio of well-diversified assets cannot escape all risk”
It also explains unsystematic risk as “Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through appropriate diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be unsystematic risk”

A different school of thought believes that true diversification is where one has investments in businesses, stocks (paper assets), real estate, commodities, etc. These are all not related and never traded on the same market though companies under them could be trading shares on the stock exchange market. If one has billion of shares as mutual funds, these shares are being traded on the same market. There is enough evidence to prove that when the stock breaks down, in say America and other advanced countries, stock exchanges all over the world are affected. We saw it in 2007 and even it is still happening.

• One other thing that is not clear with mutual funds is that fund managers claim the shares are bought from different companies in different industries to help manage risk, the evidence is not transparent. It is just assurance to investors by fund managers, but for all one knows all one’s shares are always from the same company loaded with both systematic and even unsystematic risks, especially where fund managers have difficulty buying shares from different companies in different industries but can easily buy from the same company, wouldn’t they buy?

Some people even say that there is nothing mutual about mutual fund. They say it is one-sided and really geared towards the benefits of the fund managers.
Financial education is essential for all since in one way or other we all invest. Financial literacy is needed by all to help humanity get liberated from financial captivity.

When one is financially literate, one can fully understand financial issues and financial products and one can really take informed decisions on investment issues. It is hard to get money these days, so if one gets some money one needs to know what exactly what one wants to do with the money and best advice is be financially educated. Financial literacy is not Accounting or Finance. Financial literacy or education is all about money. We all use money. Don’t we? We all work hard for money, don’t we? Why don’t you invest some of your time in learning something about money? If you can spend thousand of Ghanaian cedis, dollars, etc, to get yourself educated on Medicine, Accounting, Finance, Law, Engineering, Communication, etc so you can earn high pay, then why don’t you spend your leisure time learning how to have control over your hard-earned salary?
I have said that you cannot live in the world today and beyond without being financially literate. You would be branded as someone, who never thought of generations and society after you.

Godwin-Xavier Ayeebo is a Financial Literacy Activist, an Accountant, a Writer and founder of Financial Literacy Training Institute, (FINALTI) a non-governmental or not-profit making organization incorporated and registered under the laws of Ghana to help educate the Ghanaian and the world populace on Financial Literacy.

I entreat all, individuals and institutions that have interest and passion in Financial Literacy Education in Ghana and in the world to come and support Financial Literacy Training Institute, (FINALTI) reach out to greater number of people through free educational sessions. Support can come in any form and you can contact us through the emails below.

©2012, Godwin-Xavier Ayeebo
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