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Investment alternatives for the small investor

THE financial investment markets in Zimbabwe have generally been regarded as the preserve of companies and high net worth individuals.

This has come about as a re

sult of several factors, some of them real and some of them imagined, but overall it appears there is a widely held perception that there are “barriers” to entry into these markets for the small investor.

The first of these “barriers” is information. While the wealthy have greater access to information, for example on which markets are yielding better, the small investors face difficulty in accessing such information. A stockbroker for instance is less inclined to want to talk to an individual from whom s/he will get brokerage commission of $50 000 after discussing for 30 minutes, when they can make a three-minute telephone call to a fund manager (who already has the relevant background information from the fund’s research department), which will land them a $5 million deal.

In an attempt to break this information barrier, Adway offers independent research and advisory services on the website (http://www.adway.co.zw) at minimal cost, which dramatically lowers the cost of entry into these markets for many investors.

While the issue of creating and managing one’s own portfolio was addressed in previous issues, responses are indicating that there is still a class of potential investors that is not informed on appropriate investment vehicles for them.

Direct investments in the stock market, for instance, require one to have an amount of money, based on current conditions, in excess of around $1 million. This is because there are fixed charges required in order to acquire shares (apart from the variable brokerage fees), which could take up the bulk of one’s funds if the amount is small. For investors with less than this amount, therefore, alternatives are called for.

The most common alternative is the unit trust fund. Unit trust funds work by pooling together several investors’ funds, and investing the pooled fund in the financial markets collectively. This way, the fixed charges associated with entering the different markets are distributed over a larger number of people, and thus become bearable. Unit trust funds are also able to negotiate better rates on the money market than the individual investors would get on their own. Unit trust funds are run by asset management firms, and are governed by the Collective Investments Scheme Act. The fund is managed by the asset management fund offering it, and thus also enjoys the experience and access to information of the asset management firm.

Unit trust funds offer different types of investments; there are money market funds which invest purely in the money market, stock market funds which invest mostly in the stock market, and hybrid funds which invest in both markets.

The difference between the funds is mainly in terms of the risk/return profile. Money market funds offer low risk and low returns (returns are based on prevailing interest rates). Stock market funds are more risky, but also offer the chances of higher returns. Investing in these funds is in a way similar to investing on the stock market. You have to be prepared to wait longer for results. Hybrid funds offer a half-way house in terms of risk and return.

Investing in unit trust funds is therefore in many ways similar to investing directly on your own, as mentioned in previous articles.

There are advantages and disadvantages associated with unit trust funds that the investor should be aware of before going into these, though. The biggest advantage, from the perspective of the small investor, is that you need less money to enter into these investments than you would need to directly buy equities or go into the money market viably on your own. Units can be purchased for an initial investment as low as $100 000 compared to the $1 million plus for direct investments. You also get to have someone managing your investments for you, once you’ve selected your preferred investment type based on your risk preference.

Generally, unit trust funds will perform better than savings accounts, for instance.

Possibly the biggest disadvantage is the fact that you have no say over the composition of a unit trust fund, because you are one among many investors. Your investment return is thus dependent on the competency of the asset management firm with whom you invest.

You also face the risk that the asset management firm itself will fail, in addition to the normal investment risk. It is thus necessary to evaluate the fund into which you are about to invest before committing your funds.

Although past performance is not an indicator of future performance in this business, it is a good place from which to start. Funds with a track record for good performance are more likely to maintain this than those lacking such a record.

Another potential problem is the notification period required before one can disinvest, and charges associated with entry and exit. It is necessary to determine these upfront, to avoid potential misunderstandings at a later stage.

In general, unit trust funds are a good starting point for the small investor, and enable them to participate in the field of investments. One can add to their fund over time, and eventually can build up enough capital to take the next step of investing more profitably on their own. They also enable one to learn the discipline required when investing in financial markets. Until next week, happy investing!

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