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Good times for money market mutual funds

Posted : May 09, 2016

Mutual funds (otherwise called collective investment schemes) are one of the emerging investments products in Ghana today. There are currently over 30 registered mutual funds in Ghana managed by several investments banking firms. Mutual funds are regulated by the Securities and Exchange Commission of Ghana. The growth in number is due to investors’ growing interest in this investment product over the last five years. It is important that investors understand how mutual funds operate.

A mutual fund is a professionally managed collective investment scheme that pools funds from investors to create a larger fund that is invested on their behalf. Mutual funds are usually open or close-ended. An open-ended mutual fund does not have restrictions on the amount of shares the fund will issue. The fund will continue to issue shares no matter how many investors there are.

An open-ended fund also buys back shares when investors wish to liquidate. A close-ended mutual fund, on the other hand, has restrictions: it has a fixed unit capital and the fund sells a specific number of units.  Investors cannot buy the units of a closed-ended mutual fund after the IPO period. Existing investors cannot exit the fund until end of the scheme’s term. Closed-ended funds are usually listed on the stock exchange to afford investors the opportunity to exit before end of the scheme’s term.

Each shareholder participates proportionally in the gain and loss of the fund based on the extent of shares held. By investing in mutual funds, investors diversify their portfolio across a large number of securities so as to minimise risk. By spreading investors’ funds over diverse securities, which is what a mutual fund does, the investor need not worry about fluctuations on the individual securities in the fund’s portfolio. Investors who may have limited resources to hold different investments enjoy a well diversified and balanced asset mix.

Types of mutual funds

In Ghana, mutual funds are generally equity or long-term oriented and money market or short-term oriented funds. There is also a mix of the two, usually called a balanced fund. The objectives of a fund depend on the type of fund and its investment style. Some objectives may include achieving capital appreciation or providing regular income for investors.

Investors benefit from products that take care of their long-term financial needs such as home purchase, child education financing and retirement planning etc.  Some mutual funds also offer investors regular flow of income to take care of their short-term needs. Depending on the investor’s objective for investing, the investor will opt for an equity mutual fund or a money market mutual fund, or a mix of them.

Money market mutual funds invest mainly in fixed (certificates of) deposits, Treasury bills and other short-dated liquid instruments. Equity mutual funds, on the other hand, invest mainly in stocks of listed or unlisted companies.

Growth in mutual funds

A study conducted in 2009 established that mutual funds attracted few investors because of poor savings culture, high fees and commissions as well as difficulty in fund valuation. In the last three (3) years, however, there has been a surge in mutual fund investors as well as mutual funds products.  A greater percentage was investing in money market mutual funds.  Money market mutual funds’ total assets under management (AUM), recorded for nine (9) funds at the end of the year 2015, was over GH¢394.8million as against GH¢152.78million recorded for equity funds in the same period.

Money Market mutual funds have over the years yielded higher returns on funds invested than they would have made in savings accounts. This is generally on account of high quality and high yielding investments in the funds. First Fund (the best-performing money market mutual fund in Ghana now), a money market mutual fund managed by FirstBanC Financial Services Limited (FirstBanC) for example, currently has an annualised yield of 37.94% (as at end of April 2016). This compares favourably with savings accounts which averaged 10% per annum.

First Fund’s total asset under management has grown by about 538% over the last three (3) years.  Its clientele base has also increased tremendously, by about 60% over the same period. In 2015, First Fund investors grew by 24% while the fund went up by 94% (GH¢21.6million) to GH¢44.5million.


The increasing number of investors opting for money market mutual funds and mutual funds in general can be attributed to their affordability. Mutual funds usually have low initial subscription investment. Some require as low as GH¢20 to open a mutual fund account and similar amounts for subsequent top-ups. Investors can also top-up their investment without restrictions. Some funds partner with banks, bringing convenience to their shareholders.

Investors also benefit from professional management of funds they have invested. Mutual funds remain an ideal choice for investors with limited knowledge, time and money. The investor benefits from a diverse portfolio, unlike if funds are placed in savings accounts, Treasury bills or a few stocks. Pooled funds are professionally invested across industries, sectors and asset classes. The rationale is to curtail losses that may occur from some of the fund’ assets/investments with gains from other assets/investments -- which losses otherwise would have been very costly for an individual investor.

Unlike other investments -- i.e. holding stocks, fixed term deposits etc. -- mutual funds tend to be very liquid because of regular redemption needs of investors. For some funds it takes an investor a minimum of twenty-four (24) hours and a maximum of five (5) working days to access their funds.  It also offers flexibility, since investors are able to top-up their fund and withdraw without breaking into the investment.  In recent times, Fund Managers have created mutual fund products that are targetted toward a specific investment objective or a specific investment sector. For example, there are funds that are targetted toward education-financing.  This emerging trend is all geared toward providing investors with less costly investments that satisfy their specific needs.

Economic and market conditions

The performance of a mutual fund is tied to performance of the general economy of each country. Characteristic of an expansionary economy is that monetary needs of people and industries are met and, with surplus cash at hand, individuals tend to increase deposits in investments.  In a growing economy (growth in GDP), where people demand more money for transactional purposes, average interest rates rise. This rise in interest rates makes money market instruments more attractive. Money market investments normally outperform in such a high interest rate environment.

Conversely, if interest rates are generally low in the money market (which has not happened in recent times), money market mutual funds’ returns dwindle.

When an economy is healthy and growing, businesses tend to report better earnings and growth. All other things being equal, this growth reflects on the share prices of the companies and on the entire equity market. Equity mutual funds thus generally outperform under such economic condition. On the other hand, a lower GDP or a slowing economy can have an adverse effect on businesses, which tend to affect stock prices and thus equity mutual funds. This is because of the direct relationship between the stock market and equity mutual fund; they tend to outperform when the economy does well and underperform when the economy performs badly.

If the monetary policy stance adopted is such that interest rates are increased, money market mutual funds tend to benefit from these high rates -- since fund managers are able to bargain for competitive interest rates on placements, and this reflects on the fund’s returns.  Over the last three years the stock market has seen a mixed performance. The GSD composite index recorded 8.12%, 69.29%, 4.40% and -11.12% in 2012, 2013, 2014 and 2015 respectively. This performance was reflected in returns of most equity mutual funds: for example, FirstBanC Heritage Fund (equity fund managed by FirstBanC) returned 8.53%, 54.66%, 6.65% and 4.23% in the same period.

In November 2015, the Monetary Policy Committee revised the Monetary Policy Rate upward to 26% from 25%. The monetary policy rate is a guide to all other markets rates. To this end, it was expected that fixed term instrument’s interest rates as well as the GoG Treasury bill rates would increase to reflect this monetary policy stance. However, indicative Treasury bill rates have declined by about 4.89% and 2.94% for 91-day and 182-day bills respectively. This could be attributed to interventions of the central bank in the market because of funds from the Eurobond, second tranche of the IMF bailout programme and Cocobod loan.

The central bank indicated that the Eurobond issue was to settle local debts, and as such the central bank reduced borrowings from the local market…and this reflected in Treasury rates. Treasury bill market (and by extension the fixed deposit market) fell marginally to end 2015 at 22.9% from 25.83 in January 2015. In the first quarter of the year, Treasury rates were expected to remain stable; however, rates are still expected to increase slightly toward the second quarter of the year, as governments normally increase spending in election years.

Risk assessment

It is vital for investors to know their risk appetite before they go into purchasing any class of mutual fund. The relationship between risk and return is inevitable, and investors seeking high returns should be prepared to take on high risk.  Even so, investors seeking to preserve their capital and meet short-term finance needs should seriously consider purchasing a money market mutual fund.

Good times

It is definitely a good time to invest in money market mutual funds.  It is an affordable investment vehicle for all cross-sections of persons -- i.e. students, workers, pensioners and novices in investment. The initial investment subscription are as low as GH¢20 (as in the case of First Fund). Mutual funds are regulated and professionally managed, so for novices who do not have any knowledge of investments, they have less cause to worry about the management of their funds. Money market mutual funds afford investors regular income without breaking into the investment, and thus are very convenient for investors who require frequent cash flows.

A fund’s track-record can aid in investment decision-making and selecting the right money market mutual fund to invest in. Past performance can tell you how volatile or stable a fund has been over a period of time, which gives an indication of investment risk. Mutual funds are not all terrific, but also come with some costs. Therefore, it is very important to assess the performance and the cost-effectiveness of the mutual fund before purchasing. With high interest rates for Treasury securities currently, while the stock market has slumped there is no doubt that this is generally a good time for money market mutual funds as investment products.

Summary Points

Over 30 registered Mutual funds in Ghana
First Fund grew by 94% in 2015 to GH¢44.5million.

Low Initial subscription (in some cases GH¢20).

High Treasury rates compared with slumped stock market provides good times for money market mutual funds.

The writer is Portfolio Analyst FirstBanC Financial Services Ltd.

Source: Bernice Frempomaa Boafo | thebftonline | Ghana



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