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Lower risk investment option for average investor

BY: Franklin Ayensu
The writer

The maxim “all hands are not created equal” rings true in many spheres and perhaps, it is most true when it comes to investments. From the quantum of available disposable income to the needs and aspirations of the investor, as well as their level of understanding of financial markets to their tolerance for risk, there is no one-size-fits-all box.

As a matter of fact, there is a wide range of investment vehicles available for every investor class. These asset classes are, most often than not, defined along the risk-return spectrum. They include the least risky (cash and its equivalents and progress to fixed income securities) to higher-risk equities and the ultra-speculative (cryptocurrencies) which carry the added risk of not having any regulatory oversight in many jurisdictions.

The basic rule of thumb is that the higher the risk, the higher the potential return. This simply means that the investor is likely to gain more (but also equally likely to lose more) from investing in the higher-risk asset classes.

Since many investors have clear and present obligations that fall due periodically, the most conventional asset class for the vast majority of investors is that which provides fixed and periodic returns, whilst safeguarding their initial investments. If there is a starting point or only one option for most investors, it can be fixed income securities.

Fixed Income Securities

Fixed income securities, in the simplest form, refer to a debt instrument that pays fixed periodic interest amounts called coupon payments and the eventual return of principal at maturity to the investor. It can also be referred to as an investment asset class that provides contractual cash flows. It has the twin goal of preserving capital, whilst providing a steady stream of income to the investor.

There are various types of fixed Income securities. Predominant amongst them are bonds, treasury notes, treasury bills, bank fixed deposit and other money market instruments.

Bonds are debt instruments in which an investor loans money to an entity (corporate or government) that borrows the funds for a defined period of time at a fixed interest rate. They have tenures of two years and above. Interest on bonds is usually paid semi-annually. Bond prices have an inverse relationship with interest rates, that is when interest rates rise, bond prices fall and vice versa.

A treasury bill is a short-term investment product (from 91,182 and 364 days) offered by central banks on behalf of the government. It offers a one-time interest payment at maturity. The security (bill) is sold at a lower price than its face value, or a discount. When the bill matures, investors are paid the face value amount. The interest earned or return on the investment is the difference between the purchase price and the face value amount of the bill.

In return for depositing money with a bank for a predetermined period, bank pays interest to the account holder. This is known as Bank Fixed Deposits (BFD). Interest rates on BFD are normally lower than bonds but higher than traditional savings accounts.

Money market instruments, unlike bonds, are not long term in nature. They usually have tenures of less than a year. However, like other fixed income securities, they too bear a fixed rate of return. There is a wide variety of money market instruments such as commercial papers, repurchase agreements, etc. which are commonly traded in the open market.

Think of individuals who have an amount of money and would like to invest but are risk-averse, and as such not interested in stocks, currency speculation and trading or crypto currencies etc. but also want the principal amount invested intact as part of saving towards their child’s education from 2027. They can consider fixed income investments.

It is worth noting that the returns from this asset class are safer and secure as it is usually backed by the true faith of the issuing entity (government, financial institutions, blue-chip companies and corporates). However, “fixed returns” offered by unscrupulous entities have plagued and sadly, will continue to plague the financial market.

Fixed income investments come with comparatively lower risks but they are not entirely risk-free. They are subject to interest rate risk that is a change in the market value of the investment as a result of a change in the market yield (interest rate). Also, they are affected by credit risk – the possibility that an issuer could default on its contractual obligations as and when they fall due, especially for corporate issuances.

Assuring investors of guaranteed returns irrespective of whatever happens in the financial market is not entirely true as a result of the risks enumerated above. Conventional wisdom suggests that investors should diversify their portfolios; this can be done across different or within the same asset class. Investors can, and perhaps, should have a mixture of fixed income instruments of varying maturities and coupon (interest) payments.

It is easier to achieve this when there is enhanced access to a secondary market, especially for non-institutional investors.

Overview of the Ghana Fixed Income Market

The year 2015 marked a watershed moment for the fixed income market in the country as the Ghana Stock Exchange (GSE) launched the Ghana Fixed Income Market (GFIM) to facilitate the secondary trading of all fixed income securities at large and other securities to be determined from time to time.

The market is being regulated by the Securities and Exchange Commission (SEC) and the Bank of Ghana (BoG). The key objectives of the GFIM are: to bring about greater efficiency; better price discovery; increased liquidity; and greater transparency in the secondary trading of fixed income securities in Ghana, as well as bring secondary trading activities in the fixed income securities in Ghana to international best practice standards. To maintain an orderly and efficient market in securities on the GFIM, members and their registered traders shall comply with the Code of Conduct and general principles as prescribed by GFIM.

The bouquet of instruments currently traded on the GFIM include Government of Ghana treasury bills, notes and bonds, Bank of Ghana money market instruments, quasi-Government of Ghana institutions’ money market instruments, corporate notes and bonds.

The market can in the future enhance capital formation through local government bonds, district bonds, green bonds and other asset-backed securities.

This singular move has not just opened up the market for the state and private institutions to access more funds; it has also provided retail investors’ participation, improved liquidity and enhanced price discovery across the board. The GFIM is duly regulated to guard behaviour of the investing communities.

The initiative has been so well received as evidenced by the sheer volume of trades recorded on the market since its inception. The standardised fixed income market has grown exponentially from a volume traded of 5.2 billion in 2015 to 208.7 billion in 2021.

The right place

Navigating the investment waters, even for a rather conservative option such as fixed income security, can be a daunting task for many investors. This, however, is respite with the right bank.

With an industry-leading treasury arm, with strong research capabilities, in-depth understanding of financial markets, coupled with the highest regard for ethics, investors are guided and advised on what financial decisions to take.

Over the past half-decade, Access Bank for instance has consistently been in the top half of all banks in the country for key metrics such as total operating income, total assets and deposits, net interest revenue, Profit Before Tax (PBT) and Profit After Tax (PAT).

The writer is the Head of Treasury, Access Bank Ghana.