PHNOM PENH: Investment diversification across different asset classes would lower the risks compared to traditional investment portfolios. With the launch of the first Collective Investment Scheme (CIS), which was approved by the Securities and Exchange Regulator of Cambodia (SERC) recently, Cambodians now have an opportunity to further protect their investments.
The CIS scheme now allows Cambodians to diversify their asset types into more legitimate investments across different countries which in turn lower the risks. A further line of protection is with the investments being carried out only with fund managers licensed by SERC. The SERC recently approved Cambodia's first SERC-approved CIS fund – the BAMC Asia Equity Fund, managed by Banjaran Asset Management Cambodia.
Diversification of investment is not a new concept and is something that is propagated and recommended even by world financial leaders. According to the world's 6th richest man and famous investor Warren Buffet, “Never depend on a single income. Invest to create a second source”. There are many benefits to investing whereby it helps wealth creation with investors making more money.
For Cambodians, it also paves the way for financial independence, eventually leading to them not worrying about their financial stability. It can also be a solid source of additional income to top up their regular income. Importantly, it could also serve as a protection against inflation, giving the investor the freedom of affordability when prices of goods increase.
Investors, naturally would expect their assets to grow over time as they continue to maintain their investments. However, it is also important to note that all investments come with a certain amount of risk. The higher the return, the higher the risk.
These risks can be moderated through a simple action of diversifying the investment in regulated financial products. Currently, Cambodians tend to grow their wealth primarily through two forms of investments: bank fixed deposits and land-related investments. According to CEIC Data, in August 2023, Cambodia saw a record high of US$40.9 billion in total bank deposits. This was an increase from US$37 billion recorded a year ago.
There are many investment options available for investors, ranging from lower-risk investments like bank deposits and investment-grade bonds to extremely high-risk investments like private debt and private equities where investors may potentially lose all their invested capital.
❖ Investment Diversification
Investment diversification is the process of spreading your investments across different asset classes (bank deposits, stocks, bonds, real estate, etc), across different countries (HK/China, US, Japan, Singapore, Thailand, etc) and across different industry sectors (banking, consumer, technology, property, etc). The main objective is to spread the risk such that if one investment goes bad, it should not affect the overall investment. When investments are diversified, the risk is lower.
In an equities collective investment scheme fund, for example, the risk of investing in stocks can be reduced through diversification. This is done by creating a basket of stocks (known as a portfolio) comprising 30 different stocks. The diversification benefits include not just from an increase in the number of stocks invested, but also by investing in different countries and across different industry sectors such as banking, property, consumer, telecoms, technology, etc. Through diversification by adding more stocks to a fund, the risk is greatly reduced.
One point to note is that while adding more stocks to a portfolio will reduce risk, it will come to a point where the residual risk cannot be further reduced as more stocks are added. This residual risk is known as the market risk (indicated by * in Figure 3), which cannot be diversified away. An example of market risk is when a major war breaks out, or a global pandemic goes out of control, on a scale that is worse than COVID-19.
For an individual, it is troublesome to practice investment diversification. Firstly, the investment amount may be too small to diversify into different asset classes or to buy too many stocks. Secondly, transaction costs may be high and will affect the investment return as a result.
Thirdly, the investor may not have time or knowledge to track the different investments and this may lead to taking no action as a result. And lastly, investors may lack the discipline to maintain proper investments. Likewise, Cambodians generally should diversify their asset types into more legitimate investments. A good diversification would be to invest some in fixed deposits, land-related investments, and collective investment scheme funds.
Collective Investment Scheme (CIS) fund collects monies from different investors and pools them together for investment purposes. Each investor retains ownership and control of his units in the fund. The fund then invests into assets like stocks, bonds, real estate, etc.
For an equities CIS fund, for example, a professional fund manager licensed by the SERC does the investment work. Investors can choose when to invest or exit the fund. Funds come with different investment strategies and objectives and appeal to different investors with different risk appetites.
Investing into a CIS fund should offer investors an easy way to meet their investment and investment diversification objectives. An investment fund offers multiple benefits. This includes it being professionally managed by a SERC-licensed fund manager and the fund is separately approved by the SERC for sale to the investing public.
It may offer diversification benefits as some CIS funds will invest in a diversified portfolio of stocks across different countries and different industry sectors. The initial investment amount can be set at an affordable level, for example as low as US$500. With this small amount of investment, an investor can own units in a portfolio of approximately 30 stocks or more. It also gives Investors the right to buy and sell the fund on a daily basis with the pricing of the fund being transparent and published daily in the local media.
Investing should generate a reasonable, positive return with a manageable degree of risk. Individuals should generally invest in products that are regulated by the SERC, and managed by SERC-licensed fund managers. To be able to invest in fund unit, the investor shall obtain the Investor Identification Number (ID) from the SERC first. Investors should also practice investment diversification to minimize i nvestment risk. CIS fund offers investors the ease of investing and also provides other benefits from investment including diversification.