Group/Chama Investment Guidance

A popular form of “Chama” has been the “Merry Go Round” otherwise known as a Welfare Club. Members contribute a pre-determined amount of money each month and the total amount is given to one member. This rotates amongst the members throughout the year. The member will pursue a personal activity with this money i.e. pay school fees, invest in shares or real-estate, upgrade their home etc. Some of them have been able to keep aside some this contributed money for investment purposes but many remain in this state for years with no additional benefits. However, as times are changing many Chamas are either transitioning from welfare clubs to investment groups or are clearly beginning with a goal of pooling their resources together to seriously invest and grow their portfolios.

The major outstanding benefits that come with joining a chama include;

  1. Reducing relative transaction costs and broker fees.
  2. Pooling knowledge – by combining with others, you have a greater chance of finding better places to put your collective funds.
  3. Accesses to new markets – many capital markets have a minimum requirement for new accounts or investments. Through chamas, you will be able to buy more types of investments than you would alone.
  4. Cheaper diversification of risk – related to 1 and 3, you can better afford diversifying your investments. It’s cheaper to reduce the risk of losing your money when you can afford to acquire more.
  5. Specialization of management functions – you can save time by assigning roles to each of your friends (i.e. one keeps track of the money, one finds where to invest it, and one performs all of the transactions). You would have to do these tasks yourself otherwise.
  6. Discipline and structure – forces you to acquire a discipline of saving. Saving on an individual level proves difficult for many. Participating in a group on the other hand ensures mandatory saving in the form of regular contributions. As an individual, it is easier to break your commitment especially when emergencies crop up
  7. Diminishes and Eliminates fear of Investing; – most budding investors are terrified at the thought of investing on their own, probably due to the risk of failure and a feeling of inadequacy. A group therefore offers a solution transferring the pressure from the individual and spreading it to the group.

A focused Chama/Investment Group will thus need to embrace the investment discipline that demands adherence to investing skills as opposed to the traditional form of merry-go-round and tea parties. We thus guide Chamas on having the severe discipline that involves;

  • Investing Regularly – build up your capital first before beginning your investments. Once you begin the investment process, don’t stop. Try to avoid holding your contributions for more than three months before investing in opportunities.
  • Re-investing Dividends & Earnings – Chama members need to take a long- term view to your investment and re-invest back all your profits for the first couple of years. This will have tremendous impact on your overall return in the future.
  • Invest in Growth Opportunities; –  the purpose of the Chama is to grow your capital, and the investments should reflect that. This isn’t for cash that you may need in a medical emergency or to cover monthly expenses.
  • Diversify your Investment Portfolio – members should embrace diversification of their assets and portfolio in terms of investment type, sector and level of risk.

 

 

For more guide on Financial Planning for Individuals, Chamas and Investment Groups in general, please contact us via the CONTACTS tab above.