Mutual funds have gradually established themselves as one of the top destinations for the money of many investors in Ghana. They have done this by being some of the biggest advertisers in the investment industry. For a lot of Ghanaian tertiary students, their first investment instrument will probably be a mutual fund because of an investment club the fund set up at their university or a seminar they held. But what exactly are mutual funds? How do they work? And what are the disadvantages and disadvantages of investing in mutual funds? That is what I will try to explain in this post.
What are Mutual Funds?
A mutual fund is a pool of monies from various investors which are invested in securities selected by a professional manager. When you invest in a mutual fund you indirectly own a portion of all the securities the mutual fund invests in. A mutual fund can be open-ended i.e. one can redeem his/her shares by selling it to the fund or close-ended in which one would have to sell his/her shares to another investor if he/she wants to get out of the fund.
Mutual Funds vs Unit Trusts
There is very little practical distinction between unit trusts and mutual funds for the average investor in Ghana. They are governed by the same legislation – Unit Trusts and Mutual Funds Regulations, 2001. By that law, mutual funds are registered as public companies while trusts are registered under a trust deed. This means mutual funds have a board of directors and other elements of a public company while unit trusts may not. Unit trusts also usually deal in units instead of shares. For the rest of this article, I will be using mutual funds to refer to mutual funds and unit trusts.
How do Mutual Funds work?
Because a mutual fund invests in other securities, its value depends on the value of the securities it invests in. At any point in time, the price of a share in the mutual fund is the value of the net assets (the value of all its assets less any liabilities) of the fund divided by the total number of shares of the fund. The returns from securities held by the fund, such as interest or dividends are usually re-invested in the fund to drive up the price of the fund’s shares. So for an investor in a mutual fund, you gain when the price of the shares rises and lose when it falls.
Restrictions on Mutual Funds in Ghana
Mutual funds in Ghana are not permitted to:
- invest in commodities, futures or options
- invest more than 10% of their net asset value in real estate except that of real estate companies
- invest more than 25% of their net asset value in securities of one company/issuer
- invest more than 10% of their net asset value in other collective investment schemes
- invest more than 15% of net asset value in a company whose shares are not listed on a registered exchange
- gain a controlling stake in any company
- short securities (place bets that the price of a security will fall in order to gain from the price fall)
- invest in any securities of a company in which the managers or officers of the fund (individually or collectively) own more than a 5% interest
Types of Mutual Funds in Ghana
Mutual funds in the country fall under one of the following categories:
Equity Funds. These mutual funds invest mainly in equities (shares). These funds have a long-term growth focus.
Examples: Omega Equity Fund Limited, SEM All-Africa Equity Fund Limited, Databank Epack Investment Fund, FirstBanC Heritage Fund Limited, Freedom Fund Unit Trust, HFC Equity Trust
Money Market Funds. The money market refers to the market for instruments (mostly loans) which mature within one year. Money market funds invest in low-risk, short-term securities such as treasury bills. These funds are concerned primarily with protecting capital rather than seeking growth.
Examples: Galaxy Money Market Fund Limited, EDC Money Market Unit Trust, Gold Money Market Fund Limited, Databank Money Market Fund Limited, First Fund Limited, HFC Unit Trust, Legacy Unit Trust, SEM Money Plus Fund Limited, Sirius Opportunity Fund Limited, Stanbic Cash Trust, TTL Income Haven Fund
Bond/Fixed Income Funds. These invest in longer-term fixed income securities such as bonds, notes, corporate debt, fixed-deposits, debentures and longer-term government securities. They may also include some money market instruments but largely do not include equities.
Examples: All-Time Bond Fund Limited, EDC Ghana Fixed Income Trust, Omega Income Fund Limited, Richie Rich Unit Trust, SEM Income Fund Limited, Stanbic Income Fund Trust, uniSecurities Unit Trust
Real Estate Investment Trusts. These are exceptional funds which focus solely on real estate.
Example: HFC Real Estate Investment Trust
Balanced Funds. As the name suggests, these funds combine a mixture of all strategies to try to achieve both growth and short-term protection of capital.
Examples: Anidaso Mutual Fund Limited, CDH Balanced Fund Limited, CM Fund Limited, Christian Community Mutual Fund Limited, EDC Ghana Balanced Fund Limited, Galaxy Balanced Fund Limited, Dalex Vision Fund Limited, Databank Balanced Fund Limited, Databank Educational Investment Fund Limited, EM Balanced Unit Trust, Gold Fund Unit Trust, HFC Future Plan Trust, Kiddifund Limited, McOttley Unit Trust, Merban Fund Limited, MET Wealth Unit Trust, My Wealth Unit Trust, Nordea Income Growth Fund Limited, NTHC Horizon Fund Limited, SAS Fortune Fund Limited, Weston Oil & Gas Fund Limited
Ethical Funds. These type of funds deliberately exclude certain industries (e.g fossil fuel, tobacco) which they think should not be funded even if they stand to gain by investing in them.
Example: Databank Ark Fund Limited
(I listed all the mutual funds and unit trusts that I could find in Ghana and classified them as best as I could based on publicly available information. Do notify me of any mistakes in the comments.)
Fees of Mutual Funds
Mutual funds can either charge you front-end loads i.e charge a percentage (usually 1%) of every deposit you make or a back-end load (usually 0.5% – 3%) when you withdraw. They are not allowed to charge both. The usual industry practice is to charge 1% of deposited funds and nothing on withdrawal or to not charge on deposits but charge percentages for withdrawal. Charges for withdrawal decrease the longer funds have been invested and there is usually no charge on investments withdrawn after three years. Apart from this, the funds also charge an annual management fee of 1%-2.5%. 2.5% is the maximum charge allowed by law.
- Diversification of your portfolio. Since mutual funds invest in several different instruments, you are diversified just by holding them.
- Tax free. No tax is paid by investors for mutual fund returns in Ghana.
- Professional fund managers pick the securities.
- Easy to track performance. You get annual reports, daily price quotes on websites and other information you may require.
- Liquidity. When you want to cash in, you can always do that.
- Relatively low risk. You may suffer losses or underperformance but the risk of losing your whole investment is quite low.
- Relatively higher return over the long-term. Over the long-term, mutual funds tend to perform better than money market instruments.
- Management fees.
- Fees on deposits or withdrawals.
- Lack of fixed return. Unlike a fixed income investment, your returns can go up or down thus making it difficult to plan for income from the fund.
- Underinvestment. Since mutual funds consist of several investors bringing in money and withdrawing each day, they have to keep a large pile of cash to meet these commitments. This leaves a significant part of the fund’s money not invested and thus potential returns are lost.
- Limited investment options. The limitations placed on the instruments mutual funds can invest in helps to keep the fund holder safe but they also limit the ability of the fund manager to make superior returns.
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This is part two of my Guide to Investing in Ghana series. You can read part one on treasury bills.