Investment Opportunities in Kenya: A 6-Part Series Part 3: Offshore Mutual Funds
Rachael Mboya
Advocate of the High Court of Kenya with a Master of Laws in International Trade and Investments Law. Corporate & Commercial Law | IP Law | Real Estate | Banking and Securities | Finance and Taxation | Space Law
“Managing your wealth well is like tending a beautiful formal garden – you need to start with good soil and a good set of tools. Just as good soil has the proper fertility to nourish a plant, having the right foundation in financial literacy should empower you to potentially cultivate a successful investment portfolio.?This 6-Part Series on Investment Opportunities in Kenya is part of my?financial education series?to help educate you on the fundamentals of investing as you prepare to tend your very own financial garden.” ~ Rachael Mboya, Advocate of the High Court of Kenya with a Master of Laws in International Trade and Investments Law.
Introduction
Investing in offshore mutual funds in Kenya offers a gateway for local investors to diversify their portfolios internationally while accessing global markets with higher growth potential.
Offshore mutual funds are collective investment schemes that pool resources from multiple investors and invest in assets across different countries. These funds allow Kenyan investors to tap into global markets, providing exposure to international stocks, bonds, and other securities that may not be accessible locally. By investing in offshore funds, investors diversify beyond Kenyan borders, which is essential for reducing risks associated with a single economy.
For Kenyan investors, offshore mutual funds open up opportunities in markets like the US, Europe, and Asia, which offer broader growth potential than local markets. These funds usually tend to be part of a broader wealth management strategy, and are often marketed by Kenyan banks and financial institutions such as Standard Chartered, which provides access to these funds through global partnerships with international asset managers.
Mutual funds in general, are designed for longer-term holding rather than short-term trading. In fact, short-term trading by investors can hurt fund performance and limit the potential for great returns.
There are very many types of mutual funds, however, they can be categorized into 4 classes:
As the name suggests, Equity Funds consist mainly of stock investments and are the most common type of mutual funds. Equity Funds focus on a particular type of investment strategy such as Growth, Value, Large Caps and Small Caps or sectors such as Property, Technology, Energy and Healthcare. The underlying shares can be invested globally, regionally or in single countries.
2. Bond (Fixed Income) Funds
Bond Funds invest mainly in debt instruments including government bonds, corporate bonds or mortgage-backed securities. The return that a Bond Fund may have can vary depending on the type of bond. Typically, Bond Funds that invest in short-term bonds tend to be less volatile than longer term bonds. Bond Funds that invest in corporate bonds generally do so to obtain higher yields, thus carrying greater risk than government bonds.
3. Hybrid (Multi Asset) Funds
Hybrid Funds invest in a mix of stocks and bonds and may also hold money market instruments which can vary proportionally over time or remain fixed.
4. ?Money Market Funds
Money Market Funds seek to maintain a stable net asset value by investing in the short-term, high-grade securities sold in the money market. These are generally the safest, most stable securities available, including Treasury bills, certificates of deposit and commercial paper. My article series next week shall dive deeper into money market funds as a short-term investment option and how to ensure higher yields when investing. Stay tuned!
How to Invest in Offshore Mutual Funds in Kenya
Investing in offshore mutual funds in Kenya involves a few key steps, and in this article I will particularly focus on Standard Chartered Bank Kenya. The process shall entail:
?????? i.?Consultation with a Wealth Manager:
Consulting a wealth manager before investing in mutual funds is essential because they help assess your risk tolerance, ensuring you choose funds that match your financial profile.
They offer personalized financial planning, aligning investments with your short and long-term goals. With their market expertise, wealth managers guide you in selecting the right funds, enhancing diversification and risk management. They also provide ongoing portfolio management, adjusting your investments in response to market changes, and help in making tax-efficient decisions. Overall, their expertise maximizes returns and keeps your investments aligned with your financial objectives.
????? ii. Choosing the Right Fund:
Choosing the right offshore mutual fund requires careful consideration of several factors to align with your financial goals. Standard Chartered Bank has an interactive fund library that offers 24/7 access to a market leading suite of 100+ international mutual funds, which is accessible here: https://www.sc.com/ke/investment/funds/ and where your fund selection can be filtered by currency, risk rating, yearly performance and asset classes, depending on your investment interests.
When selecting the right mutual fund to invest in, firstly, you need to determine whether you are seeking long-term growth, income generation, or capital preservation. This will influence whether you select equity-focused funds or bond-oriented ones. Your risk tolerance also plays a key role, as funds vary from conservative options to high-risk investments targeting emerging markets.
Additionally, the geographical and sectoral focus of the fund matters. Developed markets offer stability, while sectors like technology or healthcare may provide higher growth. It's also crucial to assess the fund's past performance, associated management fees, and how currency fluctuations might impact your returns, particularly in relation to the Kenyan shilling. Considering these factors ensures that you select a fund that suits your investment strategy while managing costs and risks effectively.
???? iii.?Currency Options:
When selecting currency options for long-term mutual fund investments, it's essential to consider currency stability, with major currencies like the US dollar, Euro, or British Pound often providing more security against depreciation compared to weaker currencies like the Kenyan shilling. Inflation rates and interest rate stability in the currency's country of origin are also crucial, as they impact the long-term value of returns.
Diversifying your investments across multiple currencies helps mitigate foreign exchange risks, while choosing funds with currency hedging options can protect against market volatility. Additionally, it’s important to factor in how currency exchange rates will affect your returns when converting them back to Kenyan shillings, ensuring the chosen currency aligns with your investment goals and horizon.
Benefits associated with investing in Offshore Mutual Funds
There are many benefits associated with investing in offshore mutual funds. These include:
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?????? i.?Global Diversification: Offshore funds allow you to diversify your investment portfolio across various countries, sectors, and currencies. This in turn helps to reduce country-specific risks.
????? ii.?Access to High-Growth Markets: Offshore mutual funds give exposure to emerging markets such as China and India, as well as developed markets like the US and Europe, which may offer higher return of investments (ROI).
???? iii.?Professional Management: These funds are managed by professional fund managers who have the expertise and resources to track global market trends, making informed decisions on behalf of investors. Furthermore, in the event the Bank or financial institution you invested through goes bankrupt, there is no need to worry as you can always redeem your investment funds which are held separately by the fund manager.
??? iv.?Currency Hedging: By investing in foreign currencies like the US dollar or British Pound, offshore funds can provide a hedge against the depreciation of the Kenyan shilling.
????? v.?Affordability: At Standard Chartered, investment can start from as low as USD 100 through their Monthly Wealth Builder Plan or with an initial lump sum payment of USD 1,000.
??? vi.?Collateral against loans: For Standard Chartered particularly, you are able to borrow up to 70-80% of your mutual funds investment amount. This means, if you have an active investment of USD 100,000, the Bank would allow you to take up a loan of about USD 70,000-80,000 secured by your mutual fund investment. Furthermore, payment of the loan can easily be partly serviced from the returns on your investment.
Risks associated with investing in Mutual Funds
Just like any other investment vehicle, offshore mutual funds carry some risks that are important to take note of prior to making your investment. When you invest in a mutual fund, you should receive a prospectus, which will detail the risks involved in investing in the specific mutual fund. It is very important for you to review each prospectus in detail so that you are aware of all the risks you may incur for any particular mutual fund.
Some of the general associated risks with investing in offshore mutual funds include:
?????? i. Currency Fluctuations: Since these funds are typically denominated in foreign currencies, fluctuations in exchange rates can affect the value of your investment. A weakening shilling could enhance returns, while on the other hand, a stronger shilling could erode them.
????? ii.?Geopolitical Risks: International investments are exposed to political instability, economic shifts, and trade disputes in the markets they are invested in, which can in turn impact returns. It is important to keep abreast with the political atmosphere of your designated investment region in order to quickly avoid loss of investment.
??? iii.?Market Risk: This is the risk that the value of a mutual fund’s investments may fluctuate in response to broader market movements. In addition, global market downturns, such as the 2008 financial crisis or the COVID-19 pandemic, can affect the performance of offshore funds, just as they impact local markets.
Conclusion: Offshore Mutual Funds as a Long-Term Investment Strategy
For Kenyan investors, offshore mutual funds offer a strategic pathway to diversify into global markets, accessing higher returns, professional management, and long-term growth potential. While these funds come with risks such as currency volatility, they remain an effective tool for building wealth over time. By carefully selecting funds that align with your risk appetite and investment goals, you can harness the power of global markets to achieve financial stability.
As Kenya’s financial markets mature, offshore mutual funds will likely play an increasingly critical role in investment portfolios, providing exposure to broader sectors and geographical markets. For any investor looking to balance risks and returns, offshore mutual funds represent an opportunity to tap into international opportunities while mitigating local market risks.
Disclaimer: This article is for information purposes only, and as I have mentioned above, consult a wealth manager at your financial institution of choice before proceeding to invest in mutual funds. Also, Standard Chartered is not the only financial institution offering offshore mutual funds, it is a personal bias! If you have inquiries, please reach out to me @[email protected]
Article By: Rachael Mboya, an Advocate of the High Court of Kenya with a Master of Laws (LLM) in International Trade and Investments Law.
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Standard Chartered Mutual Funds Knowledge Bank
1.????? The Comprehensive Standard Chartered Interactive Fund Library is available at:
2.????? A Guide to reading a Mutual Fund Factsheet is available at:
3.????? The Standard Chartered Investments Fee Schedule is available at: