Best Investment Options in 2021
The year 2020 began full of promise, where most people were optimistic to start another decade. The onset of the COVID-19 pandemic and the continuous increase in the number of infections, has become more than just a health concern but also a monetary concern where many people have lost their sources of incomes as many businesses were affected due to a slowdown in economic growth. One of the key lessons to take away from the pandemic era is the importance of having investments that can cushion you when times get tough either through a job loss or reduced income. The initial stages of the pandemic saw investors move their investments into safer asset classes such as bonds where the number of bonds traded in March 2020 increased by 38.0%, while other investors cashed in on demand from certain stocks in the market such as those in telecommunication and technology, which were favoured by the pandemic. The shift has however, been more evenly distributed between various asset classes, as investors have learnt how to factor in the pandemic in their investment decision making.
As an investor it is important to distinguish between; an investment and savings. Investments is the purchase of assets with the hope of generating some income in future or the asset appreciating hence being able to sell it at a profit. Savings, on the other hand, is putting aside money for emergency purposes which may include the purchase of an insurance scheme, Sacco savings and the savings account at your bank. Primarily, investing grows your wealth while helping you meet your financial goals and increasing your net worth over time. Before making an investment decision there are factors that one needs to consider which include: the risk involved in undertaking the investment, the expected earnings in form of returns, the disposable income that you have ready for investment, the time horizon that you want your money to be tied to that particular investment, among other things.
While investing can build wealth, it is also advisable to balance any potential gains with the risks involved. There are many ways to go about investing, which can range from very safe choices such as Treasury bills, bank deposits and money market accounts to medium-risk options such as corporate bonds, and even higher-risk picks such as stock and cryptocurrency markets. This means that you can find various investments that offer a range of returns and fit your particular risk profile, while providing an opportunity to combine investments to create a well-rounded and diversified portfolio.
Some of the investment options to consider in for the rest of 2021 and going forward include;
- Equities – They represents an ownership holding in a company listed at a securities trading exchange and is interchangeably referred to as stocks or shares. The purchase of stocks must be facilitated by a licensed stock broker with the minimum investment being 100 shares of any company. An investor gains through capital appreciation in the event the stock trades at a higher price than the purchase price, and dividends declared by the respective companies when they make a profit. For the first three months of 2021, the Nairobi Securities Exchange gained by 4.3% in comparison to the 8.6% decline reported for the whole of 2020. The gain is an indication that as earlier highlighted investors seem to have factored in the risks that come with the pandemic. Therefore, the equities market still presents an attractive opportunity for patient investors who are willing to identify value companies who have proven to withstand the pandemic and can provide favorable capital returns and a high dividend yield in the long run.
- Fixed Income - These are debt securities that provide a return in the form of fixed pre-agreed periodic interest payments and the repayment of the principal upon maturity. Since the start of the year the yield curve – which compares the yields on bonds as compared to the remaining time to maturity, has adjusted upwards both in the short and long end. The upward readjustment means that the yields on government bonds have gone up being an indication that the government is under pressure to raise funds and the investors are asking for a premium as the risks increase due to the spike in COVID infections. The disadvantage of a rising yield curve is that it has an inverse relationship with the bond prices which could reduce the capital gains on current holders of bonds. The following are the types of fixed income securities:
- Treasury Bills – These are short-term investments which are promissory notes in nature, issued and fully guaranteed by the government with tenors of 91, 182 or 364-days. The current rates for 91-day, 182-day or 364-day are 7.1%, 7.6% and 9.3%, respectively,
- Treasury Bonds – These are long-term debt securities issued by the government with tenors of greater than 1-year. Investments in government securities are done through opening a CDS account either through the Central Bank of Kenya or a local commercial bank, who then executes the transactions on behalf of the investor. The minimum investment for government securities is Kshs 50,000.0. There are various types of investors when it comes to the bond market, they include those that hold bonds for trading purposes where they aim to profit from short term opportunities and there are also those that hold for the long term aiming to benefit from the frequent coupon payments,
- Commercial Papers – These are short term promissory notes issued by private entities as a form of raising debt, payable within one year, mainly targeting institutional investors. These securities can be secured or unsecured and are priced at a premium to the Treasury Bills with yields ranging between from 12.0% to 18.0% p.a,
- Corporate Bonds – These are long-term secured debt securities issued by companies with approval from the Capital Markets Authority (CMA) and are priced at a premium to Treasury Bonds, with the Current corporate bonds in the market are yielding from 8.5% to 10.8% p.a. They are usually listed on an exchange. Investors stand to gain from periodic coupon payment over the life of the bond, and,
- Bank Deposits – These are deposits placed with banks or financial institutions, which could either be fixed-term investments with withdrawals after a certain period lapses, or call deposits, which have no fixed deposit period, allow for unlimited withdrawals and deposits and operates like a savings account through the accrual of interest. The deposit rates as at the month of March are at 7.1%,
- Mutual Funds/ Unit Trust schemes - This is a collective investment scheme that pools money together from many investors, being managed by a professional fund manager who then invests the pooled funds in to a selected portfolio of securities to achieve objectives of the trust. The funds in the mutual fund earn income in the form of dividends, interest income and/or capital gains depending on the asset class the funds are invested in. The main types Unit Trust schemes include: Money Market Funds which mainly invests in short-term debt securities with high credit quality such as bank deposits, treasury bills, and commercial paper, an example is the Cytonn Money Market Fund (CMMF). The average return for the top 5 money market funds delivered a return of 10.2%, in of Q1’2021,
- Derivatives Market – A derivative is a financial instrument that derives its value from one or more underlying assets which can be based on different types of assets such as commodities, equities, bonds, interest rates, exchange rates, or real estates. They are legal contracts in which two parties agree to pay off each other depending on the value of an underlying asset at a certain point in time. Additionally, derivatives can either be traded over-the-counter (OTC) or on an exchange. Given the risks posed by the pandemic investors can go to the market and hedge against those pandemic related risks by taking up derivatives. The main types of derivatives contracts include: forward contracts, options contracts, futures, swaps and warrants which involve buying and selling of assets under a specified set of rules, and,
- Pension Funds - This is an investment fund where individuals contribute their pensions, which are invested in various asset classes as per regulation, and from which payments are made upon retirement, which could be in a lump sum or periodic payments. Pension funds can be categorized by type of returns – guaranteed funds, which offer a guaranteed minimum rate of return, and segregated funds, which offer market-based returns. Alternatively, they can be categorized by mode of contribution, where we have individual retirement benefit schemes, where individuals can contribute directly into the fund towards saving for their retirement, and umbrella retirement benefit schemes, that pool the contributions of multiple employers and their employees.
Investing is one of the key methods to grow and build your wealth over a period of time. The current Kenyan financial market provides investors with a range of investment options, which range from safe lower-returns assets to the more risky, higher-return ones. That range means you’ll need to understand the benefits and risks that each investment option carries so as to make an informed decision. There was a definite change in the views of investors coming into 2021, as more people became aware of the need to pursue investment options and grow their wealth in order to build a solid buffer. The current challenging situation has taught us the importance of making informed decisions particularly pertaining to financial planning and investment in various financial instruments.