MCBFI – APR 2023 – L4 – Q5 – Investor Attitude to Risk, Risk Reduction, and Mutual Funds vs Shares

Assess investors' attitude to risk, strategies to reduce risk, and distinguish between mutual funds and shares amid high T-bill rates and bond turmoil in Ghana.

Question

The current macro-economic policies have really undermined the principles covering Government Securities and its associated risks. The relatively high Treasury Bills rates have attracted massive interests by prospective investors whilst the Bond Market is in turmoil. The Bank of Ghana is receiving massive over subscription week on week by investors in Treasury Bills, in most recent Weekly Auctions.

Required:

(a) Assess the attitude to risk by investors. (6 marks)

(b) What can the investors do to avoid or reduce risk? (6 marks)

(c) Clearly distinguish between Mutual Funds and Shares. (8 marks) (Total: 20 marks)

Answer

(a) Assess the Attitude to Risk by Investors (6 marks)

Investors’ risk attitudes vary—risk-averse, risk-neutral, or risk-seeking—and in Ghana’s 2023-2025 context, with high T-bill rates (20-25%) amid bond turmoil from DDEP, most exhibit risk-averse behavior.

Risk-Averse Dominance: Preference for T-bills over bonds shows aversion to credit and interest rate risks, as DDEP haircuts eroded trust in longer-term securities. Retail investors, per BoG data, oversubscribe T-bills for capital preservation.
Influencing Factors: High inflation (~10% in 2025) and cedi volatility push towards short-term, liquid assets. Institutional investors (e.g., pension funds) align with Basel III liquidity requirements.
Practical Insight: Post-cleanup, risk-averse attitudes led to flight to quality, boosting T-bill subscriptions by 200% in auctions.

(b) What Can Investors Do to Avoid or Reduce Risk? (6 marks)

To mitigate risks in Ghana’s volatile markets, investors can employ strategies grounded in BoG’s risk management guidelines:

Diversification: Spread across asset classes (e.g., T-bills, stocks, mutual funds) to reduce unsystematic risk, as per portfolio theory (variance/covariance in syllabus).
Hedging: Use derivatives like FRAs or forex forwards to counter interest/currency risks, compliant with BoG directives.
Asset Allocation: Match horizon to risk tolerance—short-term for averse (T-bills), long-term for seekers (equities).
Research and Due Diligence: Analyze via rating agencies or BoG reports to avoid poor investments.
Insurance and Stops: Political risk insurance; stop-loss orders on GSE trades.
Professional Advice: Consult licensed advisors under Securities Industry Act, 2016 (Act 929).

Aspect	Mutual Funds	Shares (Stocks)
Definition	Pooled investment vehicles managed by professionals, investing in diversified assets (e.g., bonds, stocks) under SEC regulation.	Direct ownership in a company’s equity, traded on GSE.
Ownership	Units in the fund; indirect exposure to underlying assets.	Direct shares; voting rights and dividends.
Risk and Diversification	Lower risk due to diversification; managed per fund objectives.	Higher risk; company-specific (unsystematic).
Management	Professional fund managers; fees apply.	Self-managed or via brokers.
Liquidity	Redeemable daily at NAV; less volatile.	Traded on exchange; price fluctuations.
Returns	From pooled income/capital gains; steady.	Dividends and appreciation; variable.
Regulation	SEC-approved prospectuses; e.g., post-DDEP, funds like Databank shifted to T-bills.	GSE listing rules; BoG oversight for bank shares.
Example in Ghana	Epack Investment Fund for growth.	Shares in Ecobank Ghana for dividends.

This distinction aids investors in choosing based on risk appetite amid market turmoil.

Tags: Bond Market, Government Securities, Mutual Funds, Risk Attitude, Risk Reduction, Shares, Treasury bills
Level: Level 4

Topic: Standard Deviation
Series: APR 2023

Uploader: Samuel Duah