I have Sh1 million, which is the best investment option?

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Question: I have Sh1 million. Should I invest it in bonds, or keep it in a sacco or fixed deposit account? What do I gain or lose?


Thank you for this question. We are glad that you want to put your money to work for you. Having your money work for you is the best achievement ever. They say the best employee you can ever have is money. This employee neither asks for leave or off days nor demands any employee benefits as part of their remuneration.

Before we attempt to answer your question, allow me to do a pulse check on you first. A direct answer to your question will require a more in-depth approach to the investment subject with the sole objective of tailoring something very specific to your current and future needs. For matters of investment, one cannot have a one-size-fits-all response as there are many other factors (mostly about the investor, and the prevailing market conditions among others) that need to be put into perspective.

You seem to be eager to place yourself on the path toward wealth generation. There is no wealth conversation without investments, and there is no investment conversation without savings. There is also no savings conversation without earnings. You have said you have Sh1 million. You have, however, not revealed how this has been accumulated. I do not want to imagine that you have borrowed to invest as that would be a bad idea. I will assume that these are your accumulated savings and hence congratulate you on this achievement.

In general, before one considers pursuing an investment, there are three factors that a good financial education programme usually emphasises. The first is the investment objective, the second is the investment horizon and the third is risk tolerance.

Investment objective

People invest in various financial assets with varied objectives. Some pursue capital appreciation while others pursue cash flows. What would you be looking for in a bond? Is it the opportunity that the price of the bond may go up or is it the periodic coupon payments that are your main attraction?

Would you be interested in putting your money in the sacco purely for the dividends at the end of the financial year or would you be interested in accumulating a deposit that you may want to borrow against at some point in the future?

Would you be considering a fixed or a term deposit because of the interest you will earn for the period the money will be invested with the financial institution? A qualified financial advisor or investment professional will help you align your objectives with your choice of investment.

Time horizon

This is the length of time that you will be willing to wait for your investment to mature or reach a time when it is safe and beneficial to withdraw. Various financial securities differ in the required time horizon that an investor is in.

Some investments can be categorised as short-term, medium-term, or long-term. In your case with bonds, you will discover that they have different maturity profiles and hence may feature across all three-time horizons.

This factor is, therefore, closely aligned with the object of your investment. An individual who simply invests in bonds for the coupon payments will not mind holding a long-term bond to maturity. How long will you be willing to wait before you call back or withdraw your money? Are you in the short-term, medium-term or long-term category?

A qualified financial advisor or investment professional will help you align your investment choice to your future financial needs as your specific time horizon will demand.

Risk tolerance

You need to consider your risk appetite. Whenever you see a return being promised, there is always a risk of being onboarded. The higher the return, the higher the risk. Financial securities have varying risk profiles. Therefore before you consider investing in any of the proposed financial securities, you need to assess your risk appetite and check whether it aligns with that investment decision. While at it, you need to be aware of how economic factors impact each other and how these raise or lower your risk environment.

Since you mentioned investing in bonds, a good example would be to consider how interest rates affect your bond valuations. If you consider investing in bonds for capital appreciation, then you will need to be cognisant of the fact that when interest rates rise, the value of bonds go down.

These may sound complex, but a good financial advisor or investment professional will help you align your risk tolerance to your investment decision. Since risk cannot be eliminated, you may find them recommending a diversified portfolio that will see your money being spread across various options and in varied portions.

All the best with your investment.

George is a financial literacy trainer and General Manager, Umbrella and Retail Retirement Solutions, and Lawrence a Retirement Benefits Consultant and Manager Consulting & Advisory Division, Zamara.

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