Last week I received an interesting inquiry from one of the regular readers of this column to kick off the year. She, however, requested me not to reveal her personal details. Well, you raised quite some fundamental investment concerns that would be of public interest particularly to those above 30 years to 45 years.
There are many people within this age range with investment exposures in insurance linked investment policies, savings options as well as unit trust funds. When are they good investment options? How do you get better returns from the stock market?
One common issue people in their early 30s today face is widespread low-income levels that make it difficult to accumulate savings quickly. You are also in a market with a very large variety of savings and investment options that are not sufficiently differentiated.
Good and reliable information on these financial products is also not very easily available, constraining one to rely on a sales agent of the selling company, who is already an interested party. The third is challenge related to the narrow focus of the financial advisors who are driven by the need make money, which lead them to provide you with either partisan information or what they can sell to you rather than match your needs with the best product available in the market.
The consequences are varied but generally result in wasted opportunity and dropping of the product at the wrong age. Insurance companies in Kenya today offer a wide variety of savings options. These are usually funds requiring regular savings premiums for a predetermined number of months, usually 60 months on average.
They are intended to enable young people with age headroom and growing income achieve an accumulation of funds for their own goals. Some of these funds have insurance benefits added on, for example a personal accident cover.
Generally, insurance companies will tend to offer a guaranteed rate of return, which by the very nature of risks taken are low. You should not expect higher than 5 per cent compound return from such a savings product if it is long term. Shorter term funds may promise slightly higher returns. These products are regulated by the Insurance Regulatory Authority (IRA).
Some of these products are linked to investment in unit trusts and therefore assume some extra risk from the performance of the respective unit trust funds. The linked funds, by design, are low risk funds in line with the saver’s return objectives.
The underlying factor here is that you should have a clear reason for which you are accumulating the savings. You risk reaching mid-way and either develop buyer remorse when other investment options begin to look more lucrative or lose interest altogether because saving, by nature, is tedious.
Through their investment arms, these insurance companies also offer personal investment opportunities through unit trust funds. These are Money Market Funds, Fixed Income Funds, Equity Funds, and Balanced Funds.
Each of these unit trust funds have independent unique objectives and respective strategies for achieving them. They meet for different needs for different customer categories. None of them can be said to be better than the other without comparing the fund objective to meet personal investment objective usually at the point of purchase. These funds are regulated by the capital market authority.
Finally, stock market investing requires you to understand the dynamics affecting assets in the sectors chosen. For example, you must build capacity to interpret the economic impact factors such as economic growth and population on demand of products from a sector, as well as sector specific impacts of trends in interest rates and inflation rates, among other issues.
The alternative is to develop an investment plan with a clear policy and hand over your stock market investments to that a third party who has eyes and ears for the stock market, though a third party will not take high risks with your investment portfolio, which constrains your opportunities.
Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected]