Sun | Oct 21, 2018

Mutual funds and the small investor

Published:Sunday | June 21, 2015 | 12:00 AM

QUESTION: I was recently doing some research on how to invest in Jamaica; that's when I saw your article about mutual funds. But, for me, I don't have the capital to start investing in mutual funds. The question I would like to ask is, where can I invest with a starting capital of $16,000?

- Kenny

FINANCIAL ADVISER: Mutual funds are readily available in Jamaica through licensed investment dealers and they are registered with the Financial Services Commission.

But, I do not know of any investment dealer company that facilitates the opening of a mutual fund account at the level that you are able to afford now. Generally, the minimum sum required is US$500 or C$500, depending on the currency in which the fund is denominated.

Although many dealers accept the Jamaican dollar equivalent of that sum, it is quite a bit above J$16,000. Subsequent purchases, though, may be made for a minimum of $50 in either currency.

These funds are a very effective means of diversification. For example, they offer diversification by industry: energy, natural resources and health. They offer diversification by geography: Asia, Europe and North America. They also offer diversification by asset class: ordinary stock, bonds and other interest-bearing securities.

Consider the unit trust

If you really want the benefits of investing in mutual funds from another type of instrument, you could consider the unit trust, which also offers professional management, ease of management, diversification, liquidity, and, importantly, where you are concerned, protection against the decline of the value of the Jamaican dollar.

The local unit trust market has developed well so you do have some options and should be able to identify funds that invest in securities denominated in foreign currencies and are issued in foreign markets. Thus, you can still achieve diversification by industry, geography and asset class.

The minimum sum required to open unit trust accounts is generally much lower than that required for the mutual funds. Of course, if you still feel strongly about mutual funds, you may enter that market as soon as you have built up your resources to the point where you can enter it.

When that time comes, if there are no changes in the requirements, you will be required to open an account by presenting a photo identification such as a passport, driver's licence or national identification card, your tax registration number and proof of your address.

You will also be required to complete a client agreement form which will spell out the nature of the relationship between you and the dealer as well as a client application form, on which you will provide personal information to the dealer.

The local dealer is an agent so your application and funds will be sent abroad where the allocation will be done. The process is similar when you sell and you should expect to be paid in about three business days.

With online access, you will be able to see how your investment is doing.

Do not be discouraged. You may buy unit trust units that can give you similar benefits to those of the mutual fund or buy mutual funds when you can afford to. I hope that will be soon. Investing is a wise choice. You are on the right path.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.