By Isaiah Opiyo
For over three months now, there has been a continuous stream of requests from several local readers of this column about a fixed deposit investment scheme being traded on the streets of the city, which they describe as too good to be true.
The investment scheme has strange features that purport to offer a high interest rate of 14 per cent on deposits paid upfront without a wait for maturity, unlike the conventional deposits made in local commercial banks.
In conventional fixed deposits investments, the investor can only access the interest periodically, at the end of the maturity period with the option of reinvesting the principal upon request.
The schemes appear to awaken the memories of many investors who lost their capital in the collapsed pyramid schemes which disappeared with billions of shillings while promising investors fantastic returns.
However, one question asked by a reader appears common to many other investors: “How can we evaluate whether these fixed investment schemes currently being traded in the local market that claim to pay 13 to 15 per cent interest rates are real?”
After the bearish conditions that battered the bourse through the devaluation in stock prices, many local investors opted to liquidate their portfolios to minimise their losses as they carefully searched for diversification opportunities.
In addition, investor confidence in the equity market slumped significantly as the cases of collapsed stock brokers and investment banks began to appear.
A search for alternative investment vehicles was high and was later observed when the shift turned to the bond market with the government infrastructure bond registering overwhelming subscription.
This was followed by KenGen’s 10-year bond issue that raised Sh10 billion above the initial Sh15 billion target.
This is a confirmation that the investment appetite is still high but the gap has been created by a lack of opportunities.
Although there could be tight regulations in force, investors need to be wary and take up due diligence to assess any prevalent counter-party risks followed by investment risks before taking the plunge.
Counterparty risk refers to those that arise when the other party (the investment company) does not play its part in the agreement.
Therefore before taking up any investment offers it is vital to evaluate the company’s counter-party risk to ensure that it is reduced to as close to zero as possible.
To evaluate the counter-party risk you should first look at the past performance and trend of the investment company and the scheme to gauge its potential future performance.
Though the past performance may not be repeated in future, a stable investment scheme should be one that has been consistent relative to its peers in both good and bad times.
In this case, readers should enquire on how the fixed deposit investment schemes have performed over the past in comparison to local commercial banks. If this is the first launch, then they should exercise restraint. In terms of performance, the fact that the scheme offers a 14 per cent interest rate on deposit, high above the five to eight per cent currently being offered by local commercial banks, the next step should be to evaluate the fund management experience as an important pillar to ensure continuity and consistent performance.
If the fund management is handled by personnel with no track record of management in both the financial and investment industry, it may prove hard for the scheme to earn higher returns on investments.
A credible investment company will always have competent professionals with relevant experience, education and training who make investment decisions and implement an investment strategy.
Next, a background check on whether the investment firm operates under any regulatory supervision needs to be done.
If it operates in the financial sector, is it regulated by the Central bank of Kenya or the Insurance regulatory authority?
As you may remember, pyramid schemes thrived due to the lack of regulatory oversight at the time. One can also do a prompt visit to the firm’s premises to confirm their physical existence.
Source: Business Daily
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