A lot of people may be asking questions such as: “What is a Stock Exchange? What are Collective Investment Schemes” If you have such questions on your mind, you are not alone. Even though these ideas are not new to many Ghanaians, most are not well informed as to what exactly these are.
These frequently asked questions are here to help you understand the basics of the securities market.
A Stock Exchange is an organized market in securities (shares, stocks, and bonds). On this market, individuals and companies can buy shares of companies through a broker (In Ghana, is called broker-dealer or LDM) of the Stock Exchange and hence become part- owners or shareholders of these companies Similarly, individuals or companies. Stockbrokers can buy stocks and bonds of other companies and the Government, and become lenders to or creditors of these companies or the Government. Any individuals or company that at one time or the other lent money or bought shares through the Stock Exchange can also sell back the relevant shares or stocks through the stock exchange at any time.
Since the Stock Exchange is an organized market, it has rules and regulations which govern it. These rules and regulations are designed to protect all market participants, including the individual who puts up some funds to invest.
Collective Investment Schemes are pools of funds that are managed on behalf of investors by a professional money manager. The manager uses the money to buy stocks, bonds, or other securities according to specific investment objectives that have been established for the scheme. In return for putting money into these funds, the investor receives shares or units that represent his/ her pro-rata share of the pool of fund assets. In return for administering the fund and managing its investment portfolio, the fund manager charges a fee based on the value of the fund’s assets.
Collective investment schemes in Ghana take the form of either a Mutual Fund or a Unit Trust. The characteristics of collective investment schemes in Ghana are provided for in the Securities Industry Act, 2016 (Act 929) and are not necessarily the same as those of other jurisdictions. It is worth noting that variations exist in collective investment schemes from jurisdiction to jurisdiction. The definitions in this brochure are based on the Securities Industry Act, 2016 (Act 929). Mutual funds in Ghana are companies formed under the Companies Act, 2019 (Act 992), whilst Unit Trust operations are based on trusts under Trust needs
A mutual fund is a public or external company, incorporated solely to hold and manage securities or other financial assets. The company accepts funds from investors and uses those funds to buy a portfolio of securities and other financial assets and employs a professional fund manager to manage the investment. The company issues shares that represent pro-rata shares of the pool of fund assets to investors.
A mutual fund in Ghana may either be open-ended or close-ended.
These are funds which stand ready to repurchase their shares from the holders in any quantity and whenever the holder should desire. In addition, they sell shares in any quantity to prospective investors at whatever time the investors determine.
In other words, open-ended funds stand ready to issue new shares or redeem outstanding shares on a continuous basis. The number of shares of the fund, therefore, fluctuates as investors purchase or redeem shares. The price of a share in an open-ended fund is determined by the net asset value per share of the total value of the assets in the fund’s portfolio less any fund liabilities divided by the outstanding number of shares.
These are funds that issue a fixed number of shares and do not stand ready to repurchase their shares from their shareholders when they decide to sell them. The Securities law requires that closed-ended funds be listed on an organized exchange in order to provide liquidity to the shareholders. These shares are traded at prices determined by the law of supply and demand
The main parties involved in the organization and operation of a mutual fund are:
The company established to operate as a mutual fund company.
This is the professional fund manager appointed by the Mutual Fund Company to manage the fund’s investments. The manager must be a body corporate licensed by the Securities and Exchange Commission (SEC).
A company appointed by the Mutual Fund Company to keep custody of all securities owned by the fund. The custodian must either be a bank, an insurance company or a financial institution or a wholly-owned subsidiary of any of them approved by SEC. The role of the custodian is to protect the interest of the investor by taking custody of assets of the fund on behalf of investors. The custodian’s role is also to oversee
The manager and the custodian must be independent of the mutual fund company. Independent means that the mutual fund company should not be a substantial shareholder of the manager or the custodian.
A substantial shareholder means a shareholder entitled to exercise or control the exercise of 30% or more of the voting power at general meetings of the company or one who is in a position to control the composition of a majority of the board of directors of a company.
A unit trust is an arrangement whereby investors’ funds are pooled together and used to invest in a portfolio of securities and other financial assets, with the beneficial interest in the assets of the trust divided into units. The funds are managed by a professional manager.
A unit trust is constituted by a document known as the Trust Deed. Under the Securities Industry Act, 2016 (Act 929), unit trusts are open-ended funds and their managers stand ready to issue new units or redeem outstanding units on a continuous basis.
The parties to a Unit Trust are:
The trustee must either be a bank, an insurance company or a financial institution or a wholly-owned subsidiary of any of them approved by the SEC.
The trust deed of the unit trust is made under the seal between the manager and the trustee.
The manager appoints the trustee but the manager and the trustee must be independent of each other. Independent here means that the manager is not a substantial shareholder of the trustee, and the trustee is not a substantial shareholder of the manager.
A substantial shareholder means a shareholder entitled to exercise or control the exercise of 30% or more of the voting power at general meetings of the company or one who is in a position to control the composition of a majority of the board of directors of a company.
Mutual Funds and Unit Trusts are generally categorized according to their investment objectives and their investment policies. Some collective investment schemes focus on equities, bonds, (or fixed income securities), money market instruments, or other securities.
These funds invest in short-term securities (less than one year to maturity), corporate and government debt securities such as treasury bills and corporate notes, commercial papers; fixed deposits, etc. Some money market funds specialize in or invest only in Treasury Bills. These are generally very low-risk funds offering moderate returns.
These funds invest in debt securities like bonds, debentures, and mortgages that pay regular interest, or in corporate preferred shares that pay regular dividends. The goal, typically, is to provide investors a regular income stream with a relatively lower risk.
These are funds that invest primarily in common shares (equities) of local or foreign companies (if allowed) but may hold other assets as well. The goal is typically geared towards long-term growth through capital appreciation of the assets held. Some growth funds focus on large ‘blue-chip’ companies, while others invest in smaller or riskier companies. The performance will be affected by the success or failure of specific investments and by the performance of the stock markets.
These are funds that invest in a ‘balanced’ portfolio of equities, long-term debt securities, and money market instruments with the objective of providing reasonable returns with low to moderate risk.
These are funds which may be fixed income, growth, or balanced funds that invest in foreign securities. These funds can offer investors international diversification and exposure to foreign companies although they are subjected to risks associated with investing in foreign countries and foreign currencies.
These are funds that invest primarily in a specific geographical area (e.g. Africa) or in a specific industry (e.g. high-technology companies). As a result, specialty funds are subjected to certain risk-levels in relation to the market in which it specializes. Types of risks specialty funds face include foreign exchange, political, geographical, or sectoral (industry) risks.
These are funds that invest in a portfolio of securities selected to represent a specified target index or benchmarks, such as the GSE composite index or GSE financial stock index. The associated risk is directly related to the risk of the market that the index is measuring, such as the stock market.
This is also known as multi-manager investment. A fund of funds is a collective investment scheme that invests in other funds instead of investing in stocks, bonds or other securities. They specialize in tracking the performance of other funds and investing in them. They may invest in other mutual funds or venture into capital hedge funds, private equity funds, investment trust, etc.
There are many advantages for investing in Collective Investment Schemes:
Investing in a number of different securities helps reduce the risk of investing. When the investor buys a share/unit in a fund, he/she buys an interest in a portfolio of dozens of different securities, giving him/her instant diversification, at least within the type of securities held by the fund. For example, a portfolio made up of shares from various companies is a good example of diversification.
With many funds, the investor can begin buying shares/units with a relatively small amount of money. Some funds allow investors to buy more shares on a regular basis with even smaller monthly installments.
Mutual funds/ unit trusts are managed by professionals who are experienced in investing money and who have the skills and resources to research many different investment opportunities. Investors in these funds, therefore, get access to the professional management of their funds.
Shares of open-ended mutual funds can be redeemed at any time at the Net Asset Value per Share (NAVPS) of the fund.
Many fund management companies administer several different funds. (E.g. money market, fixed-income, growth, balanced and international funds) and allow the investor to switch between funds within their ‘fund family’ at little or no charge. This can enable the investor to change the balance of his portfolio as his personal needs or market conditions change.
The Net Asset Value Per Share (NAVPS) or the bid and offer prices of open-ended funds are reported in the press and on many internet sites as pertains in other markets, allowing the investor to continually monitor the performance of his/her investment.
The mutual fund/unit trust investor earns a return on his investment from:
Both unit holders and shareholders can expect to earn money from growth and dividend income.
This is also known as capital appreciation. If the value of a portfolio goes up, so does the value of each unit or share. Each unit or share in the fund represents a slice or share of the funds underlying the portfolio of securities. The value of a unit or share is essentially the total market value of the fund divided by the number of units or shares in circulation.
Value of a unit/share = Total Market Value of the fund
No. of units/ shares in circulation
(The above information can be obtained from the management company)
Therefore, if the value of the portfolio goes up, the value of each unit or share also goes up. This is called capital growth or capital appreciation. If you sell the units or shares at a higher price than what you paid for, you will receive a profit. On the other hand, if the value of a portfolio falls, the value of each unit or share falls too.
This is an income paid out to unitholders and shareholders. Whatever income is received by the fund may be passed onto unitholders or shareholders in the form of dividends.
However, dividends are not guaranteed; if the fund makes little or no profit, dividends may not be paid at all. A fund that concentrates on achieving capital growth for instance may have a dividend policy of paying very little or no dividend at all.
Under current tax laws, Collective Investment Schemes do not pay taxes on their incomes. Again, investors in these schemes do not pay taxes on incomes received from these schemes.
These tax incentives have been designed to encourage the pooling of investors’ resources together for investments to develop the economy.
When management companies buy and sell units or shares, there are some charges involved. These include:
These charges may be included in the issue price of a share or unit and expressed as a fixed amount or calculated as a percentage of the issue price of interest.
These fees may be included in the redemption price of a share or unit and expressed as a fixed amount or calculated as a percentage of the price per interest paid on redemption.
Other expenses such as trustee and custodian remunerations are also borne by the fund. You may refer to the prospectus or scheme particulars trust deed in the case of a unit trust for more information on fees and other charges as they vary from fund to fund.
All securities in Ghana are subject to the securities laws that are administered and enforced by the Securities and Exchange Commission (SEC). The securities laws regulate collective investment schemes in four basic ways:
Every person who establishes a scheme or manages the investment portfolio of a scheme must be licensed by the SEC. Those who sell shares/units are licensed as broker-dealers. Those who make investment decisions for collective investment schemes are licensed as fund managers, custodians, and trustees and are all licensed by SEC. The licensing requirements enable the SEC to ensure that each operator, broker-dealer, custodian, trustee, or fund manager has the basic qualifications required to act on behalf of investors.
Licensing is a continuous process and is thus subject to periodic renewal in order to ascertain the continued suitability and compliance of licensees.
Every scheme that intends to sell securities to the public must first file a prospectus with the SEC and give a summary disclosure document to each purchaser. The information contained in these documents is intended to allow investors and their financial advisers to make prudent and informed investment decisions. The mutual fund company or the unit trust manager is accountable under the law for the statements made in the prospectus. Once a fund has filed a prospectus, it is also obliged to provide investors with financial statements and other important information on a regular basis.
The Securities and Exchange Commission has also established regulations that govern investment and marketing practices in the way fund assets must be held and the types of incentives that can be paid to those who manage or sell the funds.
Many broker-dealers who will sell shares/units of funds will also be members of the Ghana Stock Exchange (GSE) which is the industry’s Self-Regulatory Organization (SRO). They subject themselves and their employees to the rules, by-laws, and policies that are established by the GSE.
The SEC controls and supervises the activities of licensees in collective investment schemes with a view of ensuring that they maintain proper standards of conduct and acceptable practices.
Licensed operators are obliged to submit financial and operational reports periodically to the Commission. These reports are considered reviews alongside set standards and criteria to ensure that licensed operators continue to remain compliant over the period of operation and not only at the time of first application for license or at the time of renewal of their license.
The basic principle of any investment is the risk-reward tradeoff associated with every investment decision made.
Understanding risk is crucial to being an informed investor. Markets can go up and down and you can make or lose money in any investment. This general investment risk is what most people think about when considering risk but there are also specific risks associated with each fund such as those listed here. For example:
The risk that the value of an investment will be eroded as inflation rates rise
The risk that the value of an investment will decline as interest rates rise
The risk that an obligation will not be paid
The risk that an investor will not be able to buy or sell an investment quickly because buying and selling opportunities are limited
The risk that an investment transacted in a foreign currency will lose value due to fluctuations in the rate of exchange
The risk that foreign investment will lose value due to unfavorable political or regulatory changes in that country
Unless you are familiar with the risks involved in making an investment, you won’t know what to expect from your fund’s performance and you won’t know how to properly evaluate it.
Although past performance cannot predict future results, looking at performance will give you a good idea of how the fund has behaved in different market conditions and how it compares to other relevant performance measures and to other funds with the same investment objective.
Each investor has different goals, needs, and constraints. The basis of all these goals is to increase systematically the investor’s wealth, which can be defined as total assets less liabilities. An investor seeking higher returns must be willing to face higher levels of risk. Some common goals include saving for your children’s education, preserving your capital, saving for your retirement, and earning income for the present.
When selecting an investment alternative, the easiest task is to identify the amount or rate of return that you want. With most investments, however, the forecast return may not be absolutely accurate since it is a forecast. In other words, there is no guarantee although it serves as a good guide.
In general, the longer the time frames of your investment, the greater the returns and the less you need to worry about short-term falls in market prices, etc.
Some funds perform better than others while other fund managers also perform better than others. Some funds are also more costly than others. As an investor, it is advisable to consult your investment adviser on these things, if you cannot make the comparisons on your own.
It is important to remember that mutual funds/unit trusts like any other investment have varying levels of risks associated with them. While certain types of funds are low-risk (such as money market or T-bill funds ), others (such as equity and bond funds) can change significantly in price in response to the ups and downs of the economy, interest rates, foreign exchange rates, and other economic variables. These fluctuations can cause the value of your investment to decline, particularly over the short term. This is known as market risk which no regulator can protect you from this.
However, regulations have been established to help ensure that the money you invest in these funds is handled carefully and professionally. For example, the mutual funds/unit trusts assets must be held separately by a custodian/trustee. Again, an independent auditor reviews and reports on the finances and practices of the funds each year.
The dealers who handle mutual fund/unit trust transactions for clients are also subject to detailed rules governing their conduct to ensure that clients are dealt with fairly and honestly.
There are no guarantees in investing in collective investment schemes. It is therefore very important to read the prospectus (offering document) very carefully to find out the type of fund being offered and whether it matches your investment objectives.
All complaints must first be lodged with your fund manager and or custodian or trustee. If your complaint remains unresolved within 30 days, you reserve the right to send your complaint to the Securities and Exchange Commission.
You may also call SEC’s toll-free line to lodge your complaint. The Securities and Exchange Commission has 30 days within which you may resolve your complaint.