Posted on February 03, 2023
Question: I have Sh1 million currently. Should I invest it in bonds, keep in a Sacco or fixed deposit account? What do I gain or lose?
By George Oyuga and Lawrence Okumu
Thank you for this question.
We are glad that you want to put your money to work for you. Having your money work for you is the best achievement ever. They say the best employee you can ever have is money. This employee neither asks for leave or off days, nor demands any employee benefits as part of their remuneration.
Before we attempt to answer your question, allow me to do a pulse check on you first. A direct answer to your question will require a more in-depth approach to the investments subject with the sole objective of tailoring something that is very specific to your current and future needs. To achieve this, it is important that you seek the services of a financial advisor or a qualified investments professional. For matters investment, one cannot have a one size-fits-all response as there are many other factors (mostly about the investor, and the prevailing market conditions among others) that need to be put into perspective.
You seem to be eager to place yourself on the path towards wealth generation. This is a good thing especially in this era where many people are getting drawn into the pressures of today’s high consumption patterns. Delayed gratification is becoming a thing of the past and hence the ability to save will soon be admired like a divine gift. The high consumption culture has pushed many into debt with more people adding to the number of those living beyond their means. Thanks to pressure from social media platforms.
There is no wealth conversation without investments, and there is no investment conversation without savings. There is also no savings conversation without earnings. You have said you have a million shillings. You have however not revealed how this has been accumulated. I do not want to imagine that you have borrowed to invest as that would be a bad idea. I will assume that these are your accumulated savings and hence congratulate you for this achievement. It is no mean fit to get your savings to that level amidst todays financial pressures. I am also assuming that you are not in the category that considers one million as pocket change. There would be a very minute number of your kind in Kenya. Recent statistics confirm that only about 79,909 people earn over Shs 100,000 monthly in Kenya. The other things I am glad about is the fact that none of your enquiries points to an expenditure or the urgent need to satisfy a basic need. I am therefore assuming that your basic needs and other financial obligations are somehow taken care of and that you are currently on a well-balanced financial see-saw.
In general, before one considers pursuing an investment, there are a few things that a good financial education program usually emphasises. There are like the three stones that you would find in a typical African traditional kitchen. The first stone is the Investment objective, the second stone is the investment horizon and the thirds stone is your risk tolerance. These three factors will always require a delicate balance just as you would expect of the three cooking stones in the traditional African kitchen. A small tilt and the stones will bring down the pot and spill the entire meal.
This refers to what you really want out of the investment where you seek to put your money. People invest in various financial assets with varied objectives. Some pursue capital appreciation while others pursue cash flows. What would you be looking for in a bond? Is it the opportunity that the price of the bond may go up or is it the periodic coupon payments that are your main attraction? Would you be interested in putting your money in the sacco purely for the dividends at the end of the financial year or would you be interested in accumulating a deposit that you may want to borrow against at some point in the future? Would you be considering a fixed or a term deposit because of the interest you will earn for the period the money will be invested with the financial institution?A qualified financial advisor or Investment professional will help you align your objectives with your choice investment.
This is the second factor that you also need to consider. This is the amount of time that you will be willing to wait for your investment to mature or reach a time when it is safe and beneficial to withdraw. Various financial securities differ in the required time horizon that an investor. Some investments can be categorized as short term, medium term or long term. In your case with bonds, you will discover that they have different maturity profiles and hence may feature across all the three time-horizons. This second factor is therefore closely aligned to the object of your investment. An individual who simply invests in bonds for the coupon payments will therefore not mind holding a long-term bond to maturity. How long will you be willing to wait before you call back or withdraw your money? Are you in the short term, medium term or long-term category? A qualified financial advisor or Investment professional will help you align your investment choice to your future financial needs as your specific time horizon will demand.
The third factor that you need to consider and which is specific to you is your risk appetite. Whenever you see a return being promised, there is always a risk being onboarded. The higher the return, the higher the risk. Financial securities have varying risk profiles. Therefore before you consider investing in any of the proposed financial securities, you need to assess your risk appetite and check whether it aligns to that investment decision. While at it, you need to be aware of how economic factors impact each other and how these raises or lowers your risk environment. Since you mentioned investing in bonds, a good example would be to consider how interest rates affect your bond valuations. If you consider investing in bonds for capital appreciation, then you will need to be cognisant of the fact that when interest rates rise, the value of bonds go down. These may sound complex, but a good financial advisor or investment professional will help you align your risk tolerance to your investment decision. Since risk cannot be eliminated completely, you may find them recommending a diversified portfolio that will see your money being spread across various options and in varied portions.
All the best with your investment.
By George Oyuga and Lawrence Okumu
George is a financial literacy trainer and General Manager, Umbrella and Retail Retirement Solutions, and Lawrence a Retirement Benefits Consultant and Manager Consulting & Advisory Division, Zamara.