For the small investor it is often difficult to invest directly in investments such as stocks and shares. Even with a small market in Guyana it may be easier said than done to pick stocks from the eight companies which see regular trading. Once one looks outside Guyana there may be what seems to be a bewildering array of investments available. The number of markets can seem endless, with several stock exchanges in the Caribbean alone and many more further afield there are tremendous opportunities. If you do mange to make up your mind and pick one of them there may still be difficulties in investing, and for the small investor brokerage fees can eat into a significant proportion of your outlay. In some territories there are withholding taxes for non-residents which would reduce returns further.
Unit trusts and mutual funds may be the answer to those who want to invest in a variety of stocks and/or markets but do not have the critical mass to make spreading their investment practical. Trusts and funds are two types of what is known as collective investment vehicles or schemes. They pool the investor's contributions and this allows them to benefit from economies of scale. So although a particular investor may only invest a few thousand Guyana dollars worth, together with all the other contributions the scheme can go out and invest in a wide variety of stocks and shares. This mechanism allows small investors to gain exposure to markets and or stocks they may not otherwise have had access to.
Ownership in both mutual funds and unit trusts is represented by notional shares in the value of the scheme, called units. To buy a unit the purchaser must pay the unit price. When they sell they will receive the current unit price for it. Unit prices can be determined in a number of ways; some schemes and most unit's trust prices will be determined by dividing the net value of the assets of the scheme by the number of units in issue, others may have a fixed price, with returns by way of income distribution or additional units of the same price being issued, still further the prices are determined by supply in demand in the market like stocks and shares (in the United Kingdom these vehicles are called investment trusts). Before buying into any collective investment scheme it is worth double checking that you understand how the unit price is determined - that way you will know what the value of your investment should be worth relative to the underlying assets of the scheme.
Errors in unit pricing can lead to substantial losses if they are not picked up quickly, since the calculations are not usually made public the investor may have to rely on the competence of the managers and that the regulator will pick up if there any discrepancies. While the concept seems easy, ie divide net asset value by number of units in issue there are several complications which can cause errors to creep in. Income tax, treatment of the liability for capital gains tax, whether investments are valued on a bid, offer or even mid-price basis, the treatment of distributions and new unit issue and the frequency of the valuation will all cause the unit price to change. There were a number of cases of unit prices being calculated in such a way that savvy investors could benefit from price movements in the market before they were reflected in the unit price. The net impact would have been the investors using the mechanism to milk the other unit holders until the scheme went bust, and because the unit pricing was set out in the prospectus the schemes had a hard time convincing the regulator that this should not be allowed to happen. The prospectus of the scheme should detail how the unit prices are determined; a financial adviser ought to be able to tell whether the unit price is being calculated fairly.
Collective investment schemes are usually run to make the managers money, so they will charge fees. Charges stem from the difference between buying and selling price of units (some times called the bid-offer spread or front end load) to regular fixed amounts and fees taken as a proportion of the fund. All of these will eat into the returns that the scheme is making on your money. Even if current charges are reasonable be on the lookout for a potential step in charges - the Trinidad & Tobago Unit Trust Corporation (TTUTC) may take up to 2% of the value of units held on some funds. As a proportion of return 2% may not seem much when returns are 20% but if returns are in the single digits then this is a substantial chunk.
Three of the prominent schemes investing in the Caribbean are the Republic Caribbean Equity Fund, the TTUTC Growth And Income Fund and the TTUTC Universal Retirement Fund. Over the past three years, even after charges these funds have performed well against the benchmark index of the stock market in Trinidad & Tobago, which suggests that they have offered value for money in the past.
As with all investments, it is not known what will happen in the future, but so long as you are happy that the charges are commensurate with the service being offered by the scheme then a soundly-managed fund will allow you to gain exposure to a wide variety of stocks through a single investment.