Personal Finance

Finding it hard to buy stocks? Try unit trusts

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Kenyans are increasingly turning to fund managers to invest for them, saving themselves the hustle of choosing a share, opening a CDS account, finding a stock brokerage firm, stock picking, and knowing when to sell while they track their profits on mobile phone applications.

With many people using mobile phones to invest as little as Sh1,000, a fund manager puts the pooled money in stocks, bonds, and debt, and the investor watches it earn interest and withdraw the money in a matter of days. This is what is driving a surge in unit trust. So what is a unit trust?

A unit trust is a fund where investor contributions are pooled together to purchase a portfolio of financial securities, such as equities (shares), bonds, cash, fixed deposits and it is managed by professional fund managers.

On average, unit trusts in Kenya will charge you an annual management fee of between two and 2.5 percent plus an initial fee which varies with the products.

Retail investments in pooled funds, which essentially come from small or buyers with no expertise in financial markets, have grown from Sh55.7 billion in March 2017 to Sh140.6 billion in the first quarter of 2022, a 152 percent jump, the latest Capital Markets Authority (CMA) quarterly statistical bulletin shows.

The increase in the number of people investing passively comes at a time when Kenya is witnessing a reduction in trading at the Nairobi Securities Exchange (NSE), with 97 percent of equities accounts being idle in the past two years.

“We might be thinking that the market is going down due to the dormant accounts but people are investing through unit trusts. We are currently looking at the data to establish whether the growth in collective investment scheme is retail investors or maybe even big accounts,” said Luke Ombara, the CMA policy and strategy director.

Where to start

There are about 20 active and regulated unit trust firms including CIC, Coop Trust, ICEA Lion, Britam, NCBA, Old Mutual, Stanlib, Madison, Dry Associates, Zimele, Amana, Equity, Genghis, Cytonn, Nabo, Apollo, African Alliance and Alpha Africa.

CIC Unit Trust Scheme has the highest assets of Sh56.92 billion which represents 40.46 percent of the entire industry, followed by NCBA Unit Trust Scheme which managed Sh19.76 billion.

Unit trusts are easy to invest in with a very low bar of entry, of as little as Sh1,000 giving clueless retail stock investors a chance to put their money under the watch of a licensed fund manager and custodian as well as a trustee.

These pool funds are also relatively safe in that they diversify investment stocks, bonds or other approved asset types, conduct regular audits and have a fund manager, custodian and a trustee licensed by the regulator.

A fund manager can spread risk by investing in a diversified portfolio of securities - something that is often difficult for an individual investor to achieve with limited funds.

The funds are also very liquid, meaning that investors can withdraw their funds at short notice, often within just a couple of days.

Unit trusts have also become an effective tool in tackling inflation which has the effect of eroding the value of cash holdings especially when they do not earn lucrative interest.

Inflation is a big concern in a market such as Kenya where the rate on bank savings accounts is 2.52 percent against an inflation rate of 7.9 percent. The unit trusts are offering returns of between 4.8 percent for Amana Capital to 10.5 percent offered by Cytonn investments.

Cytonn operates a regulated unit trust fund with Sh725.7 million which is separate from its troubled unlicensed funds, Cytonn High Yield Solutions (CHYS) and Cytonn Project Notes (CPN) holding Sh13.5 billion in Real estate investments.

“The continuous growth of unit trust in Kenya is testament to the increased investor awareness on the ease of entry and withdrawal of funds by investors as well as the appeal of earning returns on savings that are competitive enough to beat inflationary erosion,” Wycliffe Shamia said in the quarterly statistical bulletin.

Unit trusts have exploded as a passive investment option especially due to the growth of mobile money that has enabled the retail investor to put in funds and withdraw immediately via M-Pesa.

Digitisation has also seen the unit trust set up a user-friendly mobile application that helps consumers choose available products, make investments, track returns and make withdraws faster.

This has seen a lot of partnerships including Nabo Capital, a subsidiary of Centum Investment has partnered with Moneto Ventures to launch a fund that takes as little as Sh5, Britam has partnered with Fintech start-up Koa while Standard Chartered, Sanlam Investments East Africa and global digital wealth technology provider Bambu to run the digital money market fund, the SC Shilingi Fund

Safaricom is also gunning for this retail wealth management product with CEO Peter Ndegwa saying they have received regulatory approvals and should expect an official launch soon.

Safaricom is expected to partner with a fund manager already licensed by the CMA, who will also approve the new product.

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