Joshua Masinde: Many retail investors are often confused on where to pump their money in the financial markets.

However, one thing is always clear; their intent is to invest in gainful ventures. However, the challenge is how to get started, what to look out for, the risks and returns of available investment options.

The financial markets has a number of investment options that can be of interest to retail investors depending on their risk appetites, how much money they are ready or willing to invest and for how long they are ready to wait for returns.

Shares and bonds are the most common investment options in Kenya’s capital markets, so investors are often limited to the two.

Government bonds and corporate bonds bear a fixed return and are less risky compared to shares or equities, which have no fixed return but the gain depends on how they perform in the stock market.

Risk-averse

According to Old Mutual research analyst, Mr Eric Munywoki, bonds are good for the risk-averse investors seeking a fixed return on their investment over a given period. Equities on the other hand are high risk, high return.

“With shares, you can get better returns if you put your money in a company that has a high potential for growth compared to when you put your money in say, Treasury Bills,” Mr Munywoki says.

Returns on shares are not fixed or guaranteed so the investor typically has to have a high-risk appetite and hold the stock over the long-term.

Like investment bankers, advisers or stock brokers say, investing in the stock market should not be a short-term affair if an investor is keen on reaping higher capital gains.

Purchase of shares means that the investor owns a portion of the firm and they can benefit from capital gains or dividend, which is a fraction of the profits.

Investing in bonds simply means an investor advancing credit to an issuer and returns are fixed and guaranteed.

The investor does not have any voting rights in the firm he or she has lent money and does not benefit in any way from exceptional performance of the company.

The investor may choose to buy the shares or bonds in the primary market when firms are offering them for the first time or in the secondary market, when one buys them from another investor.

Bond holders are paid a certain percentage as interest on their money. They are also paid back the original amount that they lent to the company at the expiry of the bond tenure.

Most of the corporate bonds issued by firms this year have typically attracted yields averaging between 12 per cent and 13 per cent. NIC Bank, Diamond Trust Bank, UAP Group and Britam issued corporate bonds this year, which attracted high investor participation. The government securities on the other hand have returns of between eight per cent and 12 per cent this year.

The stock market has registered some of the highest returns on investments this year with Unga Group, Limuru Tea, Kakuzi and Longhorn shares making gains of over 100 per cent between January and November 2014.

Some analysts say that Kenyan capital markets have very few options for prospective retail investors. Some of the other forms of investment options expected to be introduced in the capital markers, which investors can take advantage of include municipal bonds and the Real Estate Investment Trusts (REITS).

Best returns

“The universe of investments is unlikely to change much unless we see new products in the market such as REITS. The challenge will be trying to figure out where the best returns can be made.

Clearly, if one gets promised a very good return for an investment, then probably the risk being taken is also higher,” said Eric Musau, a research analyst at the Standard Investment Bank.

Unit trusts, a form of collective investment schemes, can also provide small investors with access to professionally managed, diversified portfolios of assets.

The popularity of unit trust is not comparable to that of bonds and equities, but the Capital Markets Authority says their acceptance and popularity continues to grow.

They are typically a small investor’s answer in achieving wide investment diversification without the need of large sums of money.

“As a market becomes sophisticated and more volatile, unit trusts become safe havens for less sophisticated and less capitalised, conservative individuals in the market place,” says the markets regulator.

A number of the risks that investors should be wary of include political climate, exchange rate, inflation, currency, insecurity, current account and budget deficits, which affect the returns on investments.