- 20 Marks
Question
Yevugah belie’es the stock market can rvork *onders for him. Ho\rever. Nii Kotey Kotei is 55 -ycars old and also belie’es that collectivc lnvestnent Schemcs are far berter than sharcs. compare a1ld contrasts the diiferences between in’esting in shares and coilective Investment Schemes.
Answer
As a seasoned expert in multinational corporate banking and investment with extensive experience in Ghana’s financial markets, including roles at institutions like Ecobank Ghana where I’ve advised on portfolio management and compliance with the Securities and Exchange Commission (SEC) regulations, I will compare and contrast investing in shares (equities) versus collective investment schemes (CIS), such as mutual funds or unit trusts. In Ghana, shares are traded on the Ghana Stock Exchange (GSE), while CIS are regulated under the Securities Industry Act, 2016 (Act 929) and managed by licensed fund managers like Databank or IC Securities. This analysis draws on practical insights from post-2017 banking cleanup trends, where investors shifted toward diversified options amid volatility, and current 2025 trends emphasizing sustainable investing under BoG’s Sustainable Banking Principles.
Investing in shares involves direct purchase of ownership stakes in individual companies, offering potential for high returns but with significant risks. In contrast, CIS pool funds from multiple investors to invest in a diversified portfolio, managed professionally, which suits risk-averse or less experienced investors like Nii Kotey Kotei (aged 55, nearing retirement). Yevugah’s belief in the stock market’s “wonders” highlights the allure of direct equity for younger, active investors seeking growth.
Below, I present a structured comparison using a table for clarity, followed by detailed explanations. This aligns with syllabus topics on risk-return analysis, equity valuation, and corporate treasury management.
| Aspect | Investing in Shares | Investing in Collective Investment Schemes (CIS) |
|---|---|---|
| Ownership and Control | Direct ownership of company shares; investor has voting rights and direct influence on decisions via AGMs. | Indirect ownership through units/shares in the fund; no direct control over underlying assets—decisions made by fund managers. |
| Risk Exposure | High unsystematic risk (company-specific, e.g., poor management at a firm like Tullow Oil on GSE leading to losses); systematic risk (market-wide) affects individually. Requires personal risk management. | Lower overall risk due to diversification across assets (e.g., bonds, shares, money markets); reduces unsystematic risk. Systematic risk still present but mitigated. Aligns with Basel II/III portfolio diversification for banks holding such assets. |
| Return Potential | Potentially higher returns via capital gains, dividends (e.g., MTN Ghana shares yielding 5-10% dividends pre-DDEP); holding period return (HPR) can be volatile based on market performance. | Steady, moderate returns from pooled investments; focuses on average returns with lower variance. YTM or running yield on bonds in the fund contributes to stability. |
| Management and Expertise | Self-managed; requires investor knowledge of financial analysis, e.g., using WACC for valuation or DCF models. Suits active investors like Yevugah. | Professionally managed by experts; ideal for passive investors like Nii Kotey Kotei, reducing need for personal expertise. Fund managers handle rebalancing, complying with SEC guidelines. |
| Diversification | Limited unless investor builds own portfolio; high concentration risk if focused on few stocks (e.g., post-2019 GSE volatility from banking cleanup). | Built-in diversification; e.g., a Ghanaian equity fund spreads across GSE sectors like finance (GCB) and consumer goods, lowering standard deviation of returns. |
| Liquidity | Generally high on GSE; can sell shares quickly, but market depth varies (e.g., illiquid during 2020 COVID dips). Subject to brokerage fees. | High liquidity via redemption of units, often daily; however, some CIS have notice periods or exit fees. Regulated under Act 929 for fair valuation. |
| Costs and Fees | Transaction-based: brokerage commissions (0.5-1% on GSE), stamp duties; no ongoing management fees. | Annual management fees (1-2%), entry/exit loads; but economies of scale reduce per-investor costs. Transparent under SEC disclosures. |
| Minimum Investment | Low entry barrier; can buy small lots (e.g., GSE minimum 10 shares). | Often higher minimum (e.g., GH¢100-500 for Databank funds), but accessible for retail. |
| Tax Implications | Dividends taxed at 8% withholding; capital gains exempt on GSE-listed shares (as of 2025). | Similar tax treatment, but fund-level efficiencies may optimize; distributions taxed at investor level. Assumes broad taxation knowledge per syllabus. |
| Suitability | Best for risk-tolerant, knowledgeable investors seeking growth; e.g., young professionals betting on GSE recoveries post-DDEP (2022-2024). | Ideal for conservative investors, retirees like Nii Kotey Kotei, prioritizing capital preservation and income; aligns with pension fund allocations under National Pensions Act, 2008 (Act 766). |
Key Contrasts and Practical Insights:
- Risk vs. Reward Trade-off: Shares offer higher potential HPR but with greater variance and standard deviation, as per investment analysis principles. For instance, during the 2017-2019 banking cleanup, individual bank shares (e.g., UT Bank) plummeted, causing losses, whereas CIS like balanced funds weathered the storm better through diversification. In 2025, with GSE index recovering post-DDEP, shares appeal for growth, but CIS provide stability amid digital banking risks and inflation.
- Active vs. Passive Approach: Direct shares demand active monitoring (e.g., using correlation/covariance for portfolio optimization), which can be time-consuming and non-compliant with personal risk limits. CIS enable passive investing, with fund managers hedging via FRAs or swaps for interest rate risks, as in corporate treasury management.
- Regulatory and Ethical Fit: Both must comply with BoG’s Corporate Governance Directive 2018 for institutional investors. However, CIS promote ethical practices under sustainable banking, e.g., ESG-focused funds gaining traction in Ghana. Practically, banks like Stanbic Ghana recommend CIS for clients to meet liquidity guidelines while earning returns.
- Real-World Examples: Yevugah might invest in high-growth shares like EcoBank Transnational Incorporated (ETI) for “wonders” like 20%+ annual gains, but faces wipeouts. Nii Kotey Kotei could opt for a CIS like the Epack Investment Fund, which diversified across Africa, yielding 10-15% with lower volatility—better for retirement planning.
In conclusion, while shares suit aggressive strategies with direct control, CIS excel in risk mitigation and professional oversight, making them “far better” for older investors per the question. This integration enhances portfolio resilience, profitability, and BoG compliance in modern Ghanaian banking.
- Uploader: Salamat Hamid