How to keep pooled investment funds safe

There are many investment products being offered nowadays by various companies competing for a slice of the market. The new investment products are packaged to suit each individual’s taste and most are taking the form of a pooled fund.

A pooled fund is an investment where two or more parties combine their money, for example you and a friend jointly buying land. Examples of pooled funds include savings investment clubs commonly referred to chamas, saccos and the more complex ones like unit trusts. Most family-owned investments are pooled funds.

A pooled fund can be highly advantageous for several reasons. However, it can also be disadvantageous in some instances.

Before investing in a pooled fund, consider its nature and find out if it will benefit you or not. Consult a financial advisor to help you gauge whether the investment you are getting into is the best suited for you considering the funds you have.

Many people make investments based on emotions. Before getting into a pooled investment, understand the legal issues. If it is a simple pooled fund, for example, where you are jointly investing with a friend, document your rights in an agreement.

If the pooled fund is a simple investment vehicle, for example a chama, you should understand what your rights are amongst other legal issues.

One of the most common disputes I have handled are from clients in pooled investments. A group of ladies once consulted me over a dispute they were having over their pooled funds in a chama. As fate would have it, they did not register the chama or incorporate any legal vehicle for it, despite the large amount of deposits the account had.

All they used to do was deposit money into a bank account every month and produce the banking slip as evidence of payment. The ladies later disagreed over personal issues and decided to dissolve the chama.

It was very difficult trying to determine who would get what as they did not consider the legalities before entering into the pooled fund. They could not agree on how to settle the legal fees or the auditor’s fees. However, had they properly considered the legal issues in the chama, it would have been easier.

The potential areas that need to be mitigated in simple pooled funds are exit and dispute resolution. I would advice formation of a company limited by shares and a shareholders agreement which would govern the relationship between the shareholders.

I would advice an arbitration clause to be included in the incorporation documents so as to avoid protracted litigation in court.

The more complex pooled funds such as unit trusts, real estate investment trusts and insurance policies are governed by the investment documentation and statutes. As such, for these ones the legal issues would be much less than with the simpler funds where it is the investors who incorporate the structure.

Pooled funds enable you to make investments you would not otherwise be able to make, due to the advantage of economies of scale.

However, there is a bit of rigidity in decision making with pooled funds. For example, you cannot unilaterally decide which investment to make. It requires a lot of consensus and compromise.

Ms Mputhia is an advocate and business strategist.
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