Q&A with CMMB Securities

Q. Your column has always suggested that mutual funds are a good way to get into investing. But I read recently that local investors are being  advised to be more careful about buying mutual funds and look at long-term performance. Does this mean that mutual funds are becoming risky?
Sunity,  Claxton Bay

An “income and growth” type mutual fund may invest in fixed income  instruments as well as stocks and so there is a degree of risk to your principal depending on the percentage of the funds invested in shares. Therefore, within the “income and growth” class of mutual funds there would be varying degrees of risk depending on the investment policy. So it is important to match your own risk tolerance to the asset mix of the fund that you are investing in. Talk to a qualified financial advisor to get more detailed advice.The fact that advice about being careful in choosing funds is becoming more prevalent does not mean that mutual funds are becoming more risky.

Investing in income and growth mutual funds is always risky due to the possibility of share prices falling. However, it may be that the investment profession in Trinidad & Tobago is becoming more sensitised to the fact that a particular fund may not be suitable to all clients, but rather a fund should suit the specific needs and circumstances of a particular client. In short, some clients may be able to absorb possible losses while others may not. A financial advisor must therefore be sensitive to that fact before making a recommendation. There have been cases where financial advisors recommended risky investments which were not suitable to clients with low risk tolerances. It is thus critical that the investment profession be mindful of this.

The fact that there is also now an appeal to look at performance in the long term is probably to reiterate that funds must be held over a long investment horizon in order to generate the advertised performance. Remember, income and growth funds over a short interval may be actually losing money. It is thus imperative that you hold your money in the mutual fund over the long term to generate high returns. If you liquidate over the short term you may actually lose some part of your money due to occasional downturns in the stock market.

Q. With so many financial institutions trying to get people to invest, the marketplace is very confusing. How do I start turning the money in my savings account into real investments?
Rose, Tacarigua

Interest rates in Trinidad & Tobago have fallen drastically over the past year and a half and are now at historic lows. The rates on savings accounts have fallen in tandem with the market to the point that individuals are not earning more than 2-3% on savings accounts. Therefore, as a first step, you should move the money from your savings account into a money market account, which, depending on the institution, may be paying between 6-7%. Money Market accounts are just as safe or safer than a savings account and yet pay you at least 3% higher. Most of the money market accounts invest predominantly in Government of Trinidad & Tobago securities and since your funds are backed against these, the investment can be considered risk-free.

If you have a higher risk tolerance you can take some of your funds and put them into the local stock market, which has been performing extremely well over the past two years while stock markets all over the world have been down. Of course while the market as a whole has been doing well, there have been stocks which fell over the period. Speak to a number of brokers to get advice as to which shares are likely to perform well. Over time the broker with the best advice would be self-evident. However, even the best broker cannot be right all the time and there is an inherent risk in investing in the stock market.

Once you are able to take this risk for the reward of a much higher return then by all means proceed.  To summarise, there are alternatives to extremely low-earning savings account out there. All you need to do is determine the mix between money market and shares and then contact your broker to transact.

Questions can be sent to PO Box, 1830, Wrightson Road, Port-of-Spian Or email: cmmbsecurities@mycmmb.com