Traps investors can’t avoid

Jackson Okoth

It is now nine months since Mr Peter Monari borrowed money from a bank to buy Safaricom shares during the intial public offer.

Although he has paid the loan, which financed 80 per cent of the share purchase, Monari is disappointed at the performance of shares, trading a Sh3.10 as at the close of trading at the Nairobi Stock Exchange (NSE) on Friday compared to Sh5 in June last year.

Monari is among retail investors who had been attracted to the stock market, with the assumption that investing in shares has little risk and high returns.

To shield themselves from losses and huge risks, cautious investors are now going for unit trusts, real estate, and fixed income securities. But these assets, too, have risks.

"A single investment may produce significantly better results than the investment in unit trust, especially during a bear run," says Mr Dominic Kiarie, British American Asset Managers (BAAM) Managing Director.

On the other hand, holders of unit trusts do not reap maximum returns during a bull run due to the diversified nature of the portfolio.

"The risk one is exposed to when buying units depends on the nature of the fund. Equity funds are suitable for aggressive risk takers while money market funds for conservative investors," says Kiarie.

Risk can be defined as the chance that your actual return from an investment will be less than you expected

As with any investments, unit trusts also has risks. For instance, the investor is not directly involved in deciding on how funds are invested.

Unit Trusts

As long as unit trusts managers invest your money in accordance to the prospectus, there is little that you can do if you disagree with their investment decisions.

The investor also pays management fees to scheme managers.

For a long time, investing in real estate has been considered a safe haven, but fund managers warn that investment in real estate has its share of risks and investment pitfalls.

"One can buy property that is overvalued," says Kiarie.

He says real estate investors are not shielded from devaluations or overpricing.

Those who invest in property have their cash tied in ‘bricks and mortar’ and not accessible immediately. This investment option requires more hands on involvement in maintenance and repairs with more legal and financial exposures.

For the more conservative investors, there is the fixed income securities option, which includes instruments such as Treasury bills, bonds and commercial paper.

"The disadvantage with these instruments is their rigidity. For instance, one is not able to withdraw before a 90-day Treasury bill matures," says Kiarie.

There is also the political risk when investing in Treasury bills or bonds belonging to unstable governments.

Investing in bonds offers no hedge against inflation because inflation causes interest rates to rise which then causes bond prices to fall.

In recent years, attention has shifted to the stock market as the next investment frontier, especially among the younger generation.

However, many retail investors don’t understand how to invest in the stock market.

"During the Safaricom IPO, investors borrowed from banks, without taking into consideration that investing in the stock market is a risky affair, says Ms Jane Njeru, Kenya Association of Stockbrokers and Investment Banks Chief Executive.

During the IPO, commercial banks also took advantage of ignorant investors by enticing them with financing arrangements to enable them buy Safaricom shares.

Blaming Brokers

But now that the stock is below the IPO price, many investors are blaming stockbrokers.

"We intend to initiate an investor education campaign to educate the public on how the stock market operates," says Njeru.

She adds that decisions made by a speculator on when to enter or exit the market is different from taking a long-term view of the market.

For instance, a long-term investor will do intensive research when choosing stocks, while a retailer is preoccupied with short-term price fluctuations.

Still suffering from poor perception and public image, insurance companies have scaled up attempts to catch the attention of investors.

Saving products

Considered a product for the high-income individuals, insurance firms are now offering pension schemes, savings products, life and medical covers, that fit into the pocket of a growing middle class and low-end customer.

For instance, there are pension plans that cost as little as Sh 500 a month and travel insurance cover for as low as Sh30 a day.

However, most investors have kept off insurance products due to nasty encounters, ranging from delays in settling claims due to lack of full disclosure from sales agents.

"The main risk that has kept investors away from insurance is the fact that in the event that an insurer collapses, there is no adequate compensation for affected policy holders," says Mr Kennedy Abincha, Amaco Insurance General Manager.

"Investors are also reluctant to put their money in insurance products offering long term returns, for fear that inflation will wipe out their benefits," he says.