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(Source:
T&T Securities and Exchange Commission)
Mutual
funds have been growing at a rapid pace in T&T over
the last few years.
There is currently more than $32 billion in mutual funds
under management in T&T as of December 31, 2007;
this represents a 108 per cent cumulative increase over
the past five years.
Generally,
a conservative investor will seek to protect his/her investment
from the effects of inflation, while requiring a regular
stream of income (they prefer stability rather than volatility)
with limited capital growth (principal protection is the
main emphasis); and such an investor will usually have shorter
investment horizons. The conservative investor is risk averse;
they are willing to forfeit some return to acquire less
risky assets. A mutual fund is one such investment product
that adheres to the criteria listed above.
A mutual fund is a collective investment scheme where by
investors funds are pooled together and invested in various
financial instruments in accordance with a predetermined
investment mandate. The fund, managed by professional money
managers, is a cost effective way of providing an investor
with liquidity, as well as the benefits of diversification.
It allows even the smallest investor to participate in the
risks and rewards of investing in capital markets that might
otherwise have been out of their financial reach. The individual
investor, however, has no say in the investment decisions
being made but will receive a share of the returns earned
by the fund.
Mutual funds have been growing at a rapid pace in T&T
over the last few years. There is currently more than $32
billion in mutual funds under management in T&T as of
December 31, 2007; this represents a 108 per cent cumulative
increase over the past five years. (Figure 1).
All mutual funds are not the same; there are various types
of funds available on the local market, each with distinctive
characteristics and investment strategies which are tailored
for different investors. Table 1 shows the different types
of actively traded funds on the local market as at 31st
December 2007. The majority of local investors participate
in equity funds, growth & income funds and money market
funds. We shall briefly look at the major mutual funds available
locally to aid investors in making informed decisions.
Equity Funds
Equity funds are the most popular type of mutual funds on
the local market. As the name suggests, this portfolio is
mandated to invest mostly in common stocks. These funds
are considered riskier than the other type of funds and
are used for growing your investment. This type of fund
is more suited to the aggressive investor who is willing
to accept a little more risk. Equity funds should provide
a return higher than the other types of funds (money market,
bonds) and that will beat inflation in the long run (inflation
is currently at 11.30 per cent). On average, local equity
funds had a year-to-date return of 13 per cent as of July,
2007.
Growth and Income funds
Another popular fund is a hybrid fund known as a blended
fund. Locally it is simply referred to as a growth and income
fund. It utilises two different investment strategies. Growth
funds by itself utilise a strategy that invests in stocks
believed to be the fastest growing companies in the market.
These rarely provide dividend income (high earnings retention
rate) and are considered relatively riskier investments
compared to other mutual funds. Investors seek capital appreciation
while placing secondary emphasis on receiving interest income.
This type of fund is best suited for the investor who can
assume the risk of potential losses in their investment
in the hope of achieving substantial gains.
Income Funds invest in value companies which pay a constant,
relatively predictable stream of dividends, as well as other
stable income earning assets (fixed income investments).
While the emphasis is on earning a steady and attractive
stream of income, capital appreciation is also an objective.
These funds are less risky than growth funds.
Income and growth funds are a blend of both growth and income
earning assets, offering the benefits of both strategies.
This type of fund is best suited to the investor who is
willing to assume some level of risk to achieve a growth
in capital, but who also want to maintain a moderate level
of current income, these funds are popular with younger
investors who usually have longer investment horizons and
a relatively moderate appetite for risk.
Money Market Funds
Money Market Funds are an extremely popular destination
for conservative investors with a short-term horizon, whether
storing money for emergencies, short-term savings, or looking
for a place to store cash from the sale of an investment,
money market funds are one of the safest places for a person
to invest.
These funds invest in short-term debt instruments and typically
produce interest rates significantly higher than what a
bank could offer on a checking account or savings account,
and also rivals the returns of a certificate of deposit
(fixed deposit).
The beauty of money market funds is that they provide a
high amount of liquidity (ability to cash out relatively
quickly) that is not found in fixed deposits and are one
of the least risky types of mutual fund available, while
offering very attractive returns.
Bond Funds
A bond fund, as its name suggests, is a mutual fund which
invests primarily in bonds or other debt securities. A bond
is a fixed income instrument where a borrower agrees to
pay the lender a fixed rate of interest for a specific length
of time plus principal at the end. Bonds are considered
less risky than stocks, but do carry their own risks (namely
inflation, credit and prepayment risks). Bond funds are
often used as a form of diversification because the bond
market generally behaves differently from the stock market.
By diversifying between the two, the level of risk is significantly
lower. Bond funds are also used to create a regular stream
of income, especially important to retirees. Most of the
local bond funds invest in international bonds (Euro bonds),
with funds differentiating by which region of the world
they invest in global, US, emerging markets.
Others
Index funds try to mimic a chosen index, for example the
All T&T Index, the T&T Composite Index, or the S&P
500. An index is simply a group of stocks chosen to represent
a particular segment of the market. The fund is structured
by purchasing small amounts of each stock of the index.
The fund is simply trying to match a chosen index. (The
All T&T index has a year-to-date return of 25.6 per
cent). Some mutual funds are country generic, investing
in a particular country or group of countries eg Asia, North
America, etc.
Mutual funds are also sector specific. These funds choose
to invest in a particular industry or segment of the market
eg the energy sector. Sector funds are considered less diversified
than most mutual funds but they do offer diversification
within a particular industry.
Mutual funds were originally designed as a way for the small
investor to get a piece of the market. Mutual funds have
grown in popularity and importance, so much that large institutional
investors and small investors alike are reaping the benefits
of this investment product. As always, every investor should
be well informed when making any investment decision.
Investors should choose an appropriate mutual fund which
meets their specific investment goals.
If investors are still unsure about any investment decision,
they are encouraged to seek the advice of a professional
financial adviser.
admin@boursefinancial.com or
phone 623-0415/0416 /9360
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