4 long-term investment opportunities you should be looking at
Investing in long-term financial assets is the key to successful wealth accumulation and preservation for your future. Most Kenyans begin to think about their future in their early 40’s when retirement is looming. However, with the youth in Kenya making up two-thirds of the population, young Kenyans are thinking about their financial future now.
A long-term investment has an average tenure of 15+ years and are usually of low-to-moderate risk promising long-term financial growth. They are often the preferred option for retirement plans and vary based on your preferences, priorities and amount of capital.
Long-term investments require less frequent management and could have potentially huge returns. However, the general rules for investing still apply such as due diligence and risk assessment.
Below is a look at some ways to invest for the long-term:
Collective Investment Schemes (CIS)
A CIS is a collection of funds from different investors with a common objective for financial gain. The scheme, also known as a Unit Trust Fund, requires you to save your income collectively and invest in financial assets that could benefit you all at maturity.
This is a great way to maximize your collective dividends or interest payments by availing a larger capital injection than one individual could receive on their own. The schemes are collectively regulated by the Capital Markets Authority of Kenya but are managed by a professional fund manager – like NCBA Unit Trust Scheme – who make decisions based on their expertise on behalf of its beneficiaries.
The professional managers invest the collective funds in securities like shares, bonds, or other authorized securities in order to achieve the objective of the fund.
Private Equity (PE)
Private companies that are not listed in Nairobi Securities Exchange (NSE) can be a great source of income for your long-term investment plans. There are different forms of private equity with Venture Capital (VC) being the most popular.
VC involves the buying of shares of these private companies for a percentage stake in the company, sometimes even 100 per cent. This means an investor is entitled to profits of the company based on their stake in the company.
PE investment requires an investor to have industry knowledge to successfully predict which companies will bring in sustainable profits. A PE investor could choose to be involved in the operations of the business or not depending on the agreement.
It can be a bit risky because you must trust that the company is being completely forthcoming with its operations. In addition, private equity is not very liquid as money is mostly tied up in the company. However, if you choose your company wisely and if the timing is just right, private equity can be a very lucrative investment opportunity.
Real Estate Investment Trusts (REIT)
Real Estate may be the most popular and lucrative investment yet in Kenya. Real Estates investments are diverse ranging from REIT (Real Estates Investment Trusts), Commercial Real Estates, Crowdfunding Estates, and others.
Popular, are REITs that allow for collective investments into a portion of a real estate project acquired by a trustee on behalf of the beneficiaries. This must not be confused with property development as in REITs you do not own the property.
REITs pull together funds with the intention of receiving profits from the income generated from the property. REITs have high returns and also experience tax relief benefits allowing you to develop a diverse financial portfolio. However, before venturing into Real Estates Investment Trusts you need to ensure you do proper market research that will enable you to gauge the possible uptake and demand of the property to know the potential returns of the intended investment.
A derivative is a financial contract whose value is derived or is reliant on the value of an underlying asset. In other words, derivatives are secondary securities whose value is derived from the value of the primary security (can be a bond, equity, interest rate, commodity, market index, currency or real estate).
The contract is a private agreement between two parties where the buyer can purchase an asset, and the seller can sell the asset at a specific price and at a future set date. This is a fairly new concept in Africa and Kenya only began trading in July of 2019.
There are several types of derivatives including Over-The-Counter (OTC), Options and Futures, however, the Nairobi Securities Exchange Derivatives Market (NEXT) has only currently made available specific Futures contracts namely the Equity Index Futures and Single Stock Futures which focus on publicly traded companies. To begin trading, investors need a broker who is a certified NEXT trading member – Like NCBA Capital – to begin trading derivatives.
Investing in an asset over a long period of time always poses a risk because it is subject to unforeseen fluctuations and inflation. Diversify your long-term investments to minimize the risks and seek to have a balanced portfolio with both physical and financial assets. For long-term investment, you could also use the various financial vehicles commonly used for short term, like a fixed income funds, to invest long-term based on the maturity. Choose what best suits you