Investing can be very rewarding if you go about it the right way. Most complaints by Kenyan investors stem from discovering that the funds or assets into which they have sunk their capital do not match their investment needs. Unfortunately, this usually happens when it is far too late to do anything about it. The good news is, you can avoid ending up in such a situation by doing your due diligence prior to investing.
Today, we cover five crucial due diligence questions you should ask before you invest in any product.
- What risks does the investment carry?
This should always be your first question; not the return on investment. Unless you know beforehand all the ways you could lose your capital, you should not invest. If, having learnt all the various risks, you are less inclined to buy into a fund, then look for a product that matches your risk tolerance.
However, most risk is easily hedged using strategies such as diversification, strategic asset allocation, and stop-loss and take-profit limits. Therefore, it is important to find out what risk-management protections a fund manager has initiated and what this all means for your bottom line. If, for instance, a fund has set a stop-loss limit of 10%, in the event of loss, you would lose no more than 10% of your capital. This information will help you decide one way or another. Risk can be company specific, industry specific, or based on market movements or the investment style used.
- Is the investment manager licensed or regulated?
Find out whether both the product and the organization offering it are regulated by the Capital Markets Authority (CMA). There are instances where a company is licensed to offer investments but some of its products are not regulated. It is inadvisable to invest in an unregulated product since you are essentially forfeiting all the protections offered by CMA, whose mandate includes ensuring fund managers comply with the law and safeguarding investor interests. Ask for evidence of regulation and go a step further by verifying with CMA the information provided by the fund manager.
- How do you exit the fund?
Different products have different dissolution requirements. For instance, MMFs are highly liquid and to exit, all you need to do is send a withdrawal request to the fund manager and you have the money within 24 hours. Leaving a SACCO, on the other hand, can be a tedious process with lots of documentation, and it could take upto 60 days to recover your capital. Instead of waiting until your money is invested to find out how to leave, let the exit procedure guide your choice of investment.
- Does the investment make business sense?
This question will help you ascertain the sustainability of your investment. An asset may be making amazing returns at the moment and that may tempt you to invest in it. However, that is no guarantee that it will continue to yield those returns indefinitely. Cryptocurrency is the perfect illustration of this phenomenon, with some currencies yielding upto 400% in short amounts of time. However, they have proved to be very volatile and some investors have lost large amounts of money in Crypto simply because they did not pause to consider its sustainability. Asking this question can also help you sniff out con artists.
- How does the investment affect your portfolio?
When investing in a new product, you must consider its impact on your overall portfolio. Will it add risk or reduce it? Does it offer diversification? What other assets should you add or remove in order to rebalance the portfolio? Only once you have answers to these questions should you consider adding a product to your portfolio.
In conclusion, due diligence is a must if you want to meet your investment objectives. By conducting it, you will ascertain which products are right for you. You will also avoid being taken in by fraudsters or unlicensed parties.