Understanding Asset Classes and Investment Risk (Part 1).
Recent developments in Ghana’s investment sector has heightened the need for investors to understand the basics of asset classes and risk associated with each asset class. The first step in understanding investments is learning to distinguish the various asset classes and risk associated with each asset class. By understanding how the different asset classes behave, investors will be in a position to ask the right questions and make informed investment decisions.
Below are common asset classes in Ghana and the associated relative risk;
•Cash: Cash deposit at bank is the most common and the simplest financial form of financial asset type for many people. Cash at bank can easily be exchanged for goods and services. On the downside, interest earned on cash in savings account in banks are mostly below the rate of inflation. Over time, investments in cash kept in savings accounts shall lose a portion of purchasing power due to inflation. It is important to keep a portion of investments in cash or near cash assets to cater for emergencies.
•Government Securities: Governments borrow from the public to finance expenditures through issuance of treasury securities. The government of Ghana issues treasury bills with tenors of 91-days to 364-days, 1 and 2 year treasury notes and treasury bonds with tenors of 3-years and above. The government of Ghana sometimes issues treasury securities denominated in US$ dollars. Government securities are referred to as “risk free”. This is because, it is assumed government will not default in redeeming treasury securities. In reality, government can default in redeeming treasury securities. Government securities are therefore considered riskier than cash on the risk ladder.
•Fixed Term Deposit: Fixed term deposits are issued by commercial banks for defined tenors and interest rates. Investors are only able to redeem fixed term deposits before maturity with penalty sometimes affecting part of the principal. With recent financial sector reforms, regulations baring fund management companies from issuing fixed deposit to investors is strictly being enforced by the Securities Exchange Commission. Fixed term deposit with commercial banks are considered risker than government securities.