When it comes to investing, the youth one way or the other after listening to talks on the benefits and importance of savings and investing starts wondering what investments are suitable for them to start with.
In our part of the world, because of the level of financial literacy coupled with the recent development in the financial market, there is the need for one to understand some basics of finance and investing before taking any financial decision. Below are some of the investments a student can start with while in school.
- Mutual funds
Mutual funds are financial investments made up of a pool of money collected from many individuals to invest in securities like stocks, bonds, money market instruments like government treasury bills and others. Mutual funds are managed by professional fund managers who have experience in the financial market and allocate the fund’s to produce income for the individual investors.
The value of the mutual fund company depends on the performance of the securities the funds are used to buy. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. As an investor in mutual funds, the returns or benefits of your investment comes from these sources.
Types of mutual funds
Majority of mutual funds are equity and money market funds.
Equity mutual funds
Equity mutual funds are collective contributions that are invested or used to buy shares (stocks) in companies. This sort of fund invests principally in stocks (shares) mostly of listed companies.
Money market mutual funds
Money market mutual funds are those funds invested in safe, short-term debt instruments, mostly government Treasury bills and other short term investments. This is a safe place to park your money. The returns on this investments are mostly benchmarked on the Treasury bill rate plus 1% or 1.5% or more depending on the securities acquired. You won’t get substantial returns, but you won’t have to worry about losing your principal. The returns on this investments are far more than what you will earn on a saving account.
Balanced mutual funds
These funds are mostly a combination of equity and short investments. The money is spread in a ratio: say 70:30, thus 70% of your money will be used for safe investment and 30% for equity investments or vice versa. Balanced funds invest in hybrid of financial assets, stocks, bonds, money market instruments, or alternative investments. The objective is to reduce the risk of exposure across asset classes.
Fixed-income mutual funds
Fixed-income mutual fund focuses on investments that pay a fixed rate of return, mostly different kinds of bonds such as government bonds, corporate bonds, or other debt instruments.
Mutual funds are considered a good starting point for young investors since they have a variety of advantages. Some of which include.
- Diversification of investments and assets within a portfolio to reduce risk. Thus putting the money in different assets to minimize risk.
- Mutual funds are mostly managed and run by professionals in the financial market. Thus it helps reduce the risk of losing funds just by trying your luck.
In Ghana, the following are the mutual funds licensed by the SECURITIES AND EXCHANGE COMMISION.
All-Time Bond Fund Limited
- Anidaso Mutual Fund Limited
- Campus Mutual Fund Limited
- CDH Balanced Fund
- Christian Community Mutual Fund Limited
- CM Fund Limited
- Crystal Entrepreneur Fund Ltd.
- Crystal Wealth Fund Ltd.
- Dalex Vision Fund
- Databank Ark Fund Limited
- DataBank Balanced Fund Limited
- DataBank Educational Investment Fund Limited
- DataBank Money Market Fund Limited
- EcoCapital Prime Fund Ltd
- EDC Balanced Fund Limited
- Elite Mutual Fund PLC
- Enhanced Equity Beta Fund Ltd
- EPACK Investment Fund Limited
- Financial Independence Mutual Fund PLC
- First Fund Limited
- FirstBanc Heritage Fund Limited
- Fixed Income Alpha Plus Fund Ltd
- Galaxy Balanced Fund
- Galaxy Money Market Fund
- Gold Money Market Fund Limited
- Ideal Sika Fund Ltd.
- Investcorp Mid-Tier Fund
- Kiddifund Limited
- Merban Fund Limited
- Miners Fund Ltd.
- NGIS Money Market Fund Ltd
- Nordea Income Growth Fund
- NTHC Horizon Fund Limited
- Omega Equity Fund
- Omega Income Fund
- Plus Balanced Fund Ltd
- Plus Income Balanced Fund Ltd
- SAS Fortune Fund Limited
- SAS Midas Fund Ltd
- SEM All-Africa Equity Fund
- SEM Income Fund
- SEM Money Plus Fund
- Sirius Opportunity Fund Limited
- TTL Income Haven Fund
- UMB Balanced Fund (Merban Fund Ltd)
- Weston Oil & Gas Fund Limited
Make sure you do your own background research before selecting any of these mutual funds since they all do not charge the same fees and so does their performance vary.
2. Treasury Bill
Treasury Bill (commonly known as T-Bill) is a short-term government debt obligation issued by the central bank. Treasury bills have maturity of not more than 1 year, thus we have 3 months called the 91 day bill, 6 months called the 182 day bill and 364 days bill which is the one year instrument.
T-Bills are sold during auctions using a competitive and non-competitive bidding process. The government issues T-bills to fund various public projects, such as the construction of schools, construction of roads, affordable housing and others. When an investor purchases a T-Bill, the government is effectively writing an IOU to the investor. T-Bills are considered a safe and conservative investment since the government backs them.
T-Bills are normally held until they mature. However, some holders may wish to cash out before maturity and realize the short-term interest gains by reselling the T-bills in the secondary market.
Currently the interest rate on T-Bill in Ghana as of this write up is:
- 91 DAY BILL (3 months) 14.44%
- 182 DAY BILL (6 months) 14.95%
- 364 DAY BILL (1 year) 17.65%
It should be noted that, when you buy a 91 day T-Bill, the interest is quoted per year. So 3 months interest will be the annual returns divided by 4. Thus, 14.44% / 4 = 3.61%. It means that at the end of every 3 months, you will get 3.61% on the money invested as interest income. The 6 months bill will also have 14.95% / 2 = 7.475% every six (6) months. This is because the interest rates are quoted per annum.
3. Savings account
A savings account is an interest-bearing deposit account with a financial institution. Though these accounts typically pay low interest because their safety and reliability make them a great option for parking cash you want available for short-term needs.
Savings accounts have some limitations on how often you can withdraw your money, but generally offers some flexibility and ease to access cash. Most often savings account are held as emergency account for short-term goal like, cash for hospital bills in case something happens or accidents and others. It is also used to park funds for buying a car or going on vacation, or simply sweeping surplus cash you don’t need in your current account so it can earn more interest.
4. Equity or Shares (Stocks)
Shares are units of ownership interest in a company that provide an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. The total return that an equity investor receives consists of two elements: Dividend and Capital gain. It should be noted that investing in equities is more risky than any of the above investments especially if you are speculating and thinking it’s an investment.
Dividends are generally paid every six months from the after-tax profits of the company. Directors decide the proportion of earnings to be paid to shareholders, subject to shareholder approval. Note however that a company may not pay dividends. The reason for this may be that the company is currently unprofitable, or that it is fast growing and needs to use all cash generated to invest in productive assets.
Capital gain. The share price rises over time due to an increase in the underlying value of the business (or to temporary enthusiasm for the shares by investors, which may or may not be rational). Where do the terrific returns on shares come from: is it predominantly from dividends or capital gains? Well, over a single year the returns on equities (shares) are largely due to share price movement; dividend income contributes a relatively small amount.
5. Educational insurance
An educational insurance plan provides the dual benefits of insurance and investment. However, there are educational insurance policies where in policyholders are allowed to make periodic or occasional withdrawals before maturity of the plan. Buying educational insurance means there is investment planning involved for large number of years, which is why it is a superb tool when planning for the future.
We all have dreams. We start planning a great future and might want to conquer the whole world. But without quality education, there is no bright future. You must buy an educational insurance right away because of the academic heights you want to attain in the near future.
Though it’s good to have a financial investment for your financial freedom, there is this saying that at a younger age, “the best investment you will ever make is to invest in yourself”.