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Why you should invest in collective investment schemes

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If you are risk averse or would like to create wealth using a safe approach cognizant of the current macro-economic factors, then the Collective Investment Scheme is the product for you. PHOTO | SHUTTERSTOCK

The financial system offers a wide range of financial services and products accessible to more Kenyans in a wider geographical coverage. This is where Collective Investment Schemes come in.  

A Collective Investment Scheme (CIS) is just one of the capital market products available in Kenya that are affordable and recommended for the potential investor of all demographics. They are investment vehicles that pool resources of many small savers, generating a large pool (similar to a chama). The resources are then invested in various assets like shares, bonds, property and treasury bills with the sole purpose of generating high returns while minimising risk through diversification of investments.

Furthermore, the investors have no day-to-day control over management of the investment as it is controlled by a fund manager. In return the investor receives shares or units that represent his/her pro rata share of the pool of fund assets. 

There are various categories of CISs today, namely: Unit Trusts; Mutual Funds; Employee Share Ownership Plans (ESOPs) and Stocks. A checklist for registration of a CIS can be found on our website at  www.cma.co.ke.

If you are risk averse or would like to create wealth using a safe approach cognizant of the current macro-economic factors, then this is the product for you. In comparison to other avenues of investing, majority of the Collective Investment Schemes (CIS) in the market require an initial investment with as little as Ksh100 which is relatively affordable to the common ‘Mwananchi’.

This works to the benefit of both the investor and the fund manager in that for an investor; he/she can access investment opportunities which would otherwise be inaccessible due to the size of their initial investment amount, while for the fund manager; he/she can access a wider customer base and ultimately grow their assets under management.

Investors get the opportunity to diversify their portfolio as a result of the access to a wider range of investment securities even with limited capital. Unit trust investments can easily be redeemable either the full or partial investment based on the prevailing unit price in the market.

CISs offer potential opportunities for retail investors to access the capital market. Money Markets Funds (MMFs) are currently one of the most popular investment drivers in Kenya and make up roughly 80% of the total CIS assets under management.

This is because they invest in highly liquid securities like cash equivalents, government securities and highly rated debt-based securities therefore having a high degree of safety. They also offer relatively high returns to investors than traditional savings accounts. They experience low volatility and are less prone to market fluctuations.

MMFs are also more liquid than other investments with similar returns because they allow you to withdraw cash or buy other investments quickly. It is an ideal investment option for money one intended to use to meet short term goals. These may include school fees, Chama/investment funds, car mortgage among others.

According to the latest CMA Statistical Bulletin, CIS asset class continues to register steady growth. As of June 2022, the total Assets Under Management by the CISs were Ksh144.99 billion, a 3.07% increase from Ksh140.67 billion managed in the quarter ended March 2022.

The market invested the highest portion in Money Market Funds by up to Ksh112 billion, representing 78% of the total assets followed by fixed income and other funds at 13% and 6% respectively. Money Market Funds is preferred by investors because it is a low-risk investment channel. CISs are therefore highly recommended for all segments of the Kenyan Population.

That said, recent data indicates that the country’s inflation rate jumped to a 65-month high of 9.6 percent in October 2022, due to factors such as rise in the cost of fuel and the Russia-Ukraine conflict. The rise has eroded the value of cash holdings such as unit trust returns which have fallen below the rate of inflation between 8 and 9.5%. 

This is projected to improve as the new government implements initiatives under the Kenya Kwanza Manifesto. This is a global issue which is expected to stabilise. When we look at it from the youth perspective, CISs allow investors to participate in diversified portfolios at a relatively low cost. The initial capital does not require to be much especially given that the average cost of a mobile phone for university or college students in Kenya is about Ksh13,500.

Due to the advancement in technology in the capital markets sector, it has ensured affordable financial services which are less risky. More intermediaries are introducing facilitative mobile applications to facilitate the purchase of CISs.  

This has in turn made it easier for migrants to transfer remittances back to their households as the transaction costs have reduced tremendously.   An investor generally prefers liquidity for his/her investments. As a retiree/professional this is a plus as the assets/securities are not difficult to convert into cash. In case of an emergency, an investor can easily retrieve their money back without any difficulties within 24 hours.  

The Authority is in the process of reviewing the CIS Regulations to make them even more facilitative and enable increased participation in Collective Investment Schemes.  

Education, Awareness and Certification Department staff

Capital Markets Authority