Collective
investment schemes in Ghana take the form of either a Mutual Fund
or a Unit Trust. The characteristics of collective investment
schemes in Ghana are provided for in the Securities Industry (Amendment)
Law 2000, Act 590 and are not necessarily the same as those of
other jurisdictions.
It is worth noting that variations exist in collective investment
schemes from jurisdiction to jurisdiction. The definitions in
this brochure are based on the current Securities Industry Law
of Ghana.
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1.
What is a Mutual Fund?
A mutual fund is a public or external company incorporated solely
to hold and manage securities or other financial assets. The company
accepts funds from investors and uses those funds to buy a portfolio
of securities and other financial assets and employs a professional
fund manager to manage the investment. The company issues shares
which represent pro-rata share of the pool of fund assets to investors.
A mutual fund in Ghana may either be open-end or closed-end.
2. Open-end
funds
These are funds which stand ready to repurchase their shares from
the holders in any quantity and whenever the holder should desire.
In addition they sell shares in any quantity to prospective investors
at whatever time the investors determine.
In other words, open-end funds stand ready to issue new shares
or redeem outstanding shares on a continuous basis. The number
of shares of the fund, therefore, fluctuates as investors purchase
or redeem shares. The price of a share in an open-end fund is
determined by the net asset value per share of the fund, where
net asset value per share refers to the total value of the assets
in the fund's portfolio, less any fund liabilities, divided by
the number of shares outstanding.
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3. Closed-end
funds
These are funds which issue a fixed number of shares and do not
stand ready to repurchase their shares from their shareholders
when they decide to sell them. The Securities Industry (Amendment)t
Law requires that closed ended funds be listed on an organized
exchange in order to provide liquidity to the shareholders.
These shares are traded at prices determined by the laws of supply
and demand.
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4. Who
are Parties to a Mutual Fund?
The main parties involved in the organisation and operation of
a mutual fund are:
i) The
Mutual Fund Company
The company established to operate as a mutual fund company
ii)
The Manager
The professional fund manager appointed by the Mutual Fund Company
to manage the fund’s investments. The manager must be a body
corporate licensed by the Securities and Exchange Commission (SEC)
as an Investment Advisor.
iii) The Custodian
A company appointed by the Mutual Fund Company to keep custody
of all the securities owned by the fund. The custodian must either
be a bank, an insurance company or a financial institution or
a wholly owned subsidiary of any of them approved by the SEC.
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5.
What Relationship should exist among the Parties to
a Mutual Fund?
The manager and the custodian must be independent of the mutual
fund company. Independent, means that the mutual fund company
should not be a substantial shareholder of the manager or the
custodian.
A substantial shareholder means a shareholder entitled to exercise
or control the exercise of 30% or more of the voting power at
general meetings of the company or one who is in a position to
control the composition of a majority of the board of directors
of a company.
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6.
What is a Unit Trust?
A unit trust is an arrangement whereby investors' funds are pooled
together and used to invest in a portfolio of securities and other
financial assets, with the beneficial interest in the assets of
the trust divided into units. The funds are managed by a professional
manager.
A unit trust is constituted by a document known as the trust deed.
Under the Securities Industry (Amendment) law, Act 590, unit trusts
are open-end funds and their managers stand ready to issue new
units or redeem outstanding units on a continuous basis.
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7.
Who are Parties to a Unit Trust?
The parties to a Unit Trust are:
i) The Manager
The company that establishes the unit trust. The law requires
the company seeking to establish a unit trust to be the manager
of the Trust. The manager must be a body corporate licensed by
the SEC as an Investment Advisor prior to the establishment of
the unit trust.
ii) The Trustee
A company appointed by the Manager to take into its custody or
under its control the property of the unit trust and hold it in
trust for the investors.
The trustee must either be a bank, an insurance company or a financial
institution or a wholly owned subsidiary of any of them approved
by the SEC.
The trust deed of the unit trust is made under seal between the
manager and the trustee.
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8.
What Relationship should exist among the Parties to
a Unit Trust?
The manager appoints the trustee but the manager and the trustee
must be independent of each other. Independent here means that
the manager is not a substantial shareholder of the trustee, and
the trustee is not a substantial shareholder of the manager.
A substantial shareholder means a shareholder entitled to exercise
or control the exercise of 30% or more of the voting power at
general meetings of the company or one who is in a position to
control the composition of a majority of the board of directors
of a company.
9. Do we have Collective Investment
Schemes in Ghana?
Currently there are 2 unit trust schemes in the country. They
are the HFC Unit Trust and the HFC Real Estate Investment Trust
(HFC REIT). These 2 schemes were established by the Home Finance
Company Limited. The first one, HFC Unit Trust was established
by Legislative Instrument L.I. 1516 of 1991 and the second one,
HFC REIT approved by the Bank of Ghana acting for the SEC in 1995.
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10. What
are the Common Types of Funds?
Mutual Funds and Unit Trusts are generally categorised according
to their investment objectives and their investment policies.
Some mutual funds focus on stocks, others on bonds, money market
instruments, or other securities . On the international scene
some funds invest primarily in their countries , others invest
internationally, and some specialise in specific countries.
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11.
Common types of funds are:
a. Money Market Funds
These funds invest in short-term (less than one year to maturity)
corporate and government debt securities such as treasury bills,
and corporate notes. Some money market funds specialise in or
invest only in Treasury Bills. These are generally very low-risk
funds offering moderate returns.
b. Fixed Income Funds
These funds invest in debt securities like bonds, debentures,
and mortgages that pay regular interest, or in corporate preferred
shares that pay regular dividends. The goal, typically, is to
provide investors a regular income stream with low risk.
c. Growth or Equity Funds
These are funds which invest primarily in common shares (equities)
of local or foreign companies (if allowed), but may hold other
assets as well. The goal is typically long-term growth through
capital appreciation of the assets held. Some growth funds focus
on large ‘blue-chip’ companies , while others invest
in smaller or riskier companies. Performance will be affected
by the success or failure of specific investments and by the performance
of the stock markets.
d. Balanced Funds
These are funds which invest in a ‘balanced’ portfolio
of equities, long-term debt securities and money market instruments
with the objective of providing reasonable returns with low to
moderate risk.
e. Global and Foreign Funds
These are funds which may be fixed income, growth, or balanced
funds that invest in foreign securities. These funds can offer
investors international diversification and exposure to foreign
companies, but are subject to risk associated with investing in
foreign countries and foreign currencies.
f.
Specialty Funds
These are funds which invest primarily in a specific geographical
area (e.g. Africa) or in a specific industry (e.g. high-technology
companies). As a result, specialty funds are subject to a certain
risk-level related to the market in which it specializes. Types
of risks speciality funds face include foreign exchange, political,
geographical or sectoral (industry) risk.
g. Index Funds
These are funds which invest in a portfolio of securities selected
to represent a specified target index or benchmark, such as the
GSE All-Share Index and Databank Stock Index. The associated risk
is directly related to the risk of the market that the index is
measuring, such as the stock market.
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12.
What are the Potential Advantages of Investing in
Collective Investment Schemes?
There are many advantages for investing in Collective Investment
Schemes.
- Diversification
Investing in a number of different securities helps reduce the
risk of investing. When the investor buys a share/unit in a fund,
he/she buys an interest in a portfolio of dozens of different
securities, giving him/her instant diversification, at least within
the type of securities held by the fund. For example, a portfolio
made up of shares from various companies is a good example of
diversification.
- Affordability
With many funds, the investor can begin buying shares/units with
a relatively small amount of money (e.g.about¢20,000 for
the initial purchase). Some funds allow investors to buy more
shares on a regular basis with even smaller monthly instalments.
- Professional
Management
Mutual funds/Unit trusts are managed by professionals who are
experienced in investing money and who have the skills and resources
to research many different investment opportunities. Investors
in these funds, therefore, get access to the professional management
of their funds.
- Liquidity
Shares of open-end mutual funds can be redeemed at any time at
the Net Asset Value Per Share (NAVPS) of the fund.
- Flexibility
Many fund management companies administer several different funds.
(e.g. money market, fixed-income, growth, balanced and international
funds) and allow the investor to switch between funds within their
‘fund family’ at little or no charge. This can enable
the investor change the balance of his portfolio as his personal
needs or market conditions change.
- Performance
Monitoring
The Net Asset Value Per Share (NAVPS) or the bid and offer prices
of open ended funds are reported in the press and on many internet
sites as pertains in other markets, allowing the investor to continually
monitor the performance of his/her investment.
13. What
Returns does the Investor get from Investing in Collective Investment
Schemes?
The mutual fund/unit trust investor earns a return on his investment
from:
a. any distribution to him/her of the interest,
dividends, or capital gains earned by the fund; and
b. any net increase in the Net Asset Value
Per Share (NAVPS) of his/her fund shares/units.
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14.
Are there any Tax Advantages for Investing in Collective
Investment Schemes?
Under current tax laws, Collective Investment Schemes do not pay
taxes on their incomes. Again, investors in these schemes do not
pay taxes on incomes received from these schemes.
These tax incentives have been designed to encourage the pooling
of investors' resources together for investments to develop the
economy
15.
What are the Licensing Requirements for Operating
a Mutual Fund?
a. For a mutual fund the first step is the incorporation
of a Mutual Fund Company under the Companies Code 1963 (Act 197)
as a public limited liability company with the sole aim of holding
and managing portfolio of securities and other financial assets.
b. After the incorporation of the company, an application
is made by the company to the Securities and Exchange Commission
(SEC) for a license to operate the fund.
c. The Securities and Exchange Commission requires
the following documents to be submitted to it for its review for
the issue of a licence to operate a mutual fund.
i. Company Regulation
ii. Management Agreement
iii. Custodial Agreement
iv. Prospectus (offering document)
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16.
What are the Licensing Requirements for Operating
a Unit Trust?
For a unit trust, an application is made to the Securities and
Exchange Commission (SEC) by a company licensed by the Commission
as an investment adviser for a licence to establish a unit trust.
The Securities and Exchange Commission (SEC) requires the following
documents to be submitted to it for its review for the issue of
a licence to operate a unit trust.
i. Management Agreement
ii. Trust Deed
iii. Prospectus (offering document)
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17.
How are Collective Investment Schemes Regulated?
All securities in Ghana are subject to securities laws that are
administered and enforced by the Securities and Exchange Commission
(SEC). The securities laws regulate collective investment schemes
in four basic ways:
- Through
Registration Requirements
Every
person who establishes a scheme or manages the investment portfolio
of a scheme must be registered (licensed) by the Commission. Those
who sell the shares/units are registered as dealers. Those who
make investment decisions for collective investment schemes are
registered as advisers. The registration requirements enable the
Commission to ensure that each operator, dealer, or adviser has
the basic qualifications required to act on behalf of investors.
Registration is a continuous process, and thus subject to periodic
renewal in order to ascertain the continued suitability of registrants.
- Through
Prospectus Requirements
Every scheme that intends to sell securities to the public must
first file a prospectus with the Commission and must give a summary
disclosure document to each purchaser. The information contained
in these documents is intended to allow investors and their financial
advisers to make prudent and informed investment decisions. The
mutual fund company or the unit trust manager is accountable under
the law for the statements made in the prospectus. Once a fund
has filed a prospectus it is also obliged to provide investors
with financial statements and other important information on a
regular basis.
- Through
Regulations on Fund Operations and Sales Conduct
The Securities and Exchange Commission has also established regulations
that govern investment and marketing practices, the way in which
fund assets must be held and the types of incentives that can
be paid to those who manage or sell the funds.
Many dealers who will sell shares/units of funds will also be
members of the Ghana Stock Exchange (GSE) which is the industry's
Self-Regulatory Organisation (SRO) and both they and their employees
are subject to the rules, by-laws and policies that are established
by the GSE.
- Through
Surveillance and Monitoring
The Commission controls and supervises the activities of registrants
in collective investment schemes with a view of ensuring that
they maintain proper standards of conduct and acceptable practices.
Licensed operators are obliged to submit financial and operational
reports periodically to the Commission. These reports are reviewed
alongside set standards and criteria to ensure that licensed operators
continue to remain compliant over the period of operation and
not only at the time of first application of licence/registration
or at the time of renewal of their licence/registration.
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18.
How is a Mutual Fund/Unit Trust Investment Protected?
It is important to remember that mutual funds/unit trusts like
any other investments have varying levels of risks associated
with them. While certain types of funds are low-risk (such as
money market or T-bill funds), others (such as equity and bond
funds) can change significantly in price in response to the ups
and downs of the economy, interest rates, foreign exchange rates,
and other economic variables. These fluctuations can cause the
value of your investment to decline, particularly over the short
term. This is known as market risk, and no regulator can protect
you from this.
However, regulations have been established to help ensure that
the money you invest in these funds is handled carefully and professionally.
For example, the mutual funds/unit trusts assets must be held
separately by a custodian/trustee. Again an independent auditor
reviews and reports on the finances and practices of the funds
each year.
The dealers who handle mutual fund/unit trust transactions for
clients are also subject to detailed rules governing their conduct
to ensure that clients are dealt with fairly and honestly.
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