Investment products Part I

All about Investment Products

Introduction

We all want our money to work for us; whether our money is in cash or cows or in any commodity that is easily tradable or not. Investors always have the same question or should have, “how much can I earn from that investment”?

Investments are mostly managed by investment managers registered with NAMFISA. Investment managers set up an investor’s portfolio in such a way as to meet the investor’s investment objective.

A portfolio normally consists of different classes of assets.

What they are (investment products):

Investment products are those products that an investor would purchase with the expectation to earn a return.

A wide variety of investment products exist, including, but not limited to bonds, equities , money market instruments such as treasury bills, negotiable certifi-cates of deposit (“NCDs”), Bankers’ Acceptances (“BAs”) and investments in companies not listed on a stock exchange.

Understanding Your Investment Objectives:

Before investing, one should be clear as to why you are investing and what your expectations are.

The following are common investment objectives:

– Capital Preservation

The aim is to invest with the intention of not losing the original capital, i.e. preserving the sum of money that you have invested. Assets that are generally less risky with lower returns are common investment types that investors would choose when they want to preserve capital.

Investors approaching retirement age tend to prefer this investment choice because they have less time to recover from unpleasant market movements.

– Capital Growth

The intention is to invest in assets (investment products) that would grow your capital (money), and as a result, increase the market value of your original capital. Investors seeking to grow their original capital tend to invest in invest-ments that give higher returns. Because of the high returns sought, the risk taken on is generally high.

-Income

The investment objective aims to provide the investor with a regular source of income. Investors seeking a regular source of income from their investments should place money in cash or invest in bonds with higher interest payouts, or shares that payout a steady dividend.

-Liquidity

Investors seeking liquidity as an investment objective aims at converting in-vestments quickly into cash. One should consider whether a market already exist where there are willing buyers to buy your investments. Properties are not easily turned into cash and unlisted investments or investments in private companies, etc. are not easily turned to cash.

Be mindful as well, that at different life stages, you may have different priorities and may thus have different investment objectives. Review your investment objectives regularly to ensure that your portfolio matches them.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right

– George Soros

Other Considerations

An investor should also take into consideration, the time horizon and risk associated, and the return on investment.

-Time Horizon

One should invest with a time horizon in mind. Time horizon has to do with the number of years needed to achieve one’s financial objectives. For example, if you are 40 and investing for retirement, then your time horizon is 20 years.

Your time horizon is important because it influences the assets that you have to invest in.

-Risk

Risk is not just simply losing the capital invested, but can also be defined as the uncertainty in receiving the expected return.

If you are 20 years of age and investing for retirement, you can afford to put

Contribution by: NAMFISA Capital Markets Department

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right

– George Soros

your investment in risky assets because you have time to recover should you incur losses.

If you do not have the time to recover losses, do not put your capital in risky assets (investments).

Precautions

• Always avoid investments that offer high returns over a short period (in most cases, investments that are too good to be true are just that).
• Remember that high return equals high risk.

• Avoid being sweet talked in putting your money in an investment that you do not know or understand.

• Ask the hard questions and if you are in doubt, don’t make an investment decision in a rush.

• If you are in doubt about a financial institution, do not hesitate to contact

NAMFISA.

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