No repos for small investors
Oran Hall, Personal Financial Adviser
The Financial Services Commission (FSC) recently announced new minimum transaction values for retail repos - $1 million for local currency purchases and US$10,000 for foreign currency-denominated purchases.
The process of phasing in these new levels commenced on October 1, 2014 and will be completed by December 31, 2015.
The aim of the FSC is to facilitate the growth of collective investment schemes such as unit trusts and mutual funds. All things considered, this move should not work to the detriment of small investors.
Instead, they stand to gain. Investments in collective investment schemes are easier to manage than repurchase agreements and create less work for the investor, who will not find it necessary to keep maturity dates in mind and to determine how to manage the matured funds and the interest earned.
Further, based on current practice, the minimum sums that can be invested each time should be less for collective investment schemes than for repos.
Add to that the convenience of adding new funds to an account at any time as opposed to the need to wait for existing repos to mature to add to them or, alternatively, to purchase new repos, thus increasing the work required to manage the portfolio. It is far easier to have one unit trust account, for example, than one repo.
To the extent that the sellers of unit trusts and mutual funds have such arrangements in place, buyers of these instruments may arrange for funds to go directly from their salaries or from financial institutions at which they hold accounts to the sellers of these instruments on a structured basis. This approach can work very effectively to develop a good savings habit.
Although the instruments under the broad umbrella of collective investment schemes are quite liquid, they are long-term investments.
Repos tend to have maturities ranging from 30 days to 365 days so they are short-term instruments. The nature of the former makes them far better suited to meet long-term goals such as retirement. Additionally, they are better suited for minimising taxes through the long-term savings account facility than repos.
The low returns on repos hardly make them attractive. Unit trusts and mutual funds give superior returns due to their capacity to invest in a variety of instruments. This scope for diversification adds another benefit - risk reduction.
Risk can further be reduced by buying into funds managed by several companies. Additionally, it is possible for risk-averse persons who are attracted to instruments such as repos to buy into a variety of funds without necessarily increasing their exposure to risk.
Let me warn, though, that it would be imprudent for persons who are conservative risk takers to allow themselves to get attracted to the more high-risk funds.
Although, like repos, investments in these pooled funds can be used as estate planning tools using joint accounts or wills as a means of passing on ownership to heirs, there is also the possibility of securing loans with money market collective investment scheme instruments considering that their values tend not to depreciate. Where this happens, if loans are not properly managed, this increases the risk of rupturing the estate planning programme.
The downside to mutual funds and unit trusts is that it may be less easy to access funds than it is for repos. Whereas maturing repo funds become available at maturity and may sometimes be accessible prior to maturity, with a downward rate adjustment, sourcing funds from collective investment schemes may require a wait between the time the request is made and when the cheque is disbursed.
It should also be noted that the returns on collective scheme investments are not known at the time the funds are committed as they are based on changes in unit values, which are determined by the value of the funds and the amount of units in the fund. This is good for small investors as unit prices are the same for all unit holders. Thus, there can be no bias, real or perceived, in favour of larger investors.
Access to collective investment schemes is limited. For this to change, more companies need to secure the required licences to operate such schemes and sellers of the instruments need to establish a network that is within reach of persons who wish to participate in the market. Ultimately, the public must be educated about these instruments for persons to embrace them.
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. email@example.com