Understanding Asset Classes and Investment Risk (Part 2).
• Collective Investment Scheme: A Collective Investment Scheme (CIS) is an investment type where more than one investor pools funds to invest. A collective investment scheme is usually managed by a professional portfolio manager who is guided by investment policy statement in the scheme particulars. Mutual funds in Ghana are designated equities, fixed income or balanced mutual fund. Before investing in a mutual fund, read the scheme particulars and investigate how the portfolio manager is complying with the scheme particulars. Investors can redeem their shares in mutual funds between 2-5 days. Mutual funds are generally riskier that fixed term deposit.
•Corporate bonds: Corporate bonds are debt securities issued by corporate institutions to raise capital. The market for corporate bonds in Ghana is Ghana Fixed Income Market (GFIM). Investors can buy and sell corporate bonds on GFIM. As corporate bonds represent the obligations of the issuing company to bond holders, ability of the issuing company to pay interest and principal as they fall due should be a prime consideration for investing in corporate bonds. Corporate bonds are considered riskier than collective investment scheme.
•Stocks: A stock represents part ownership of a company. Stocks allow investors to share in the company’s success through increase in share prices and dividends. The prices of shares move up and down based on performance and other information about the company and the economy. In Ghana, shares of public companies are traded on the Ghana Stock Exchange. Shares are considered risker than corporate bonds.
•Alternative Investments: The universe of alternative investments include real estate, private equity funds and commodities. Alternative investments are illiquid and are long term investments in nature. Alternative investment is considered riskier than stocks.
Before participating in any investment, it is important to have knowledge of the asset class and understand the risk associated with the asset class.
One way to minimize risk is diversification. You can start with investment in the asset class you understand and add to it over time. Investment education is important; always avoid investments you do not understand.