A high investment return is naturally attractive. When presented with two investment opportunities, many investors will instinctively gravitate towards the one promising the higher return. However, focusing on returns alone can cause investors to overlook some of the most important questions they should ask before committing their money. An investment’s performance should be considered alongside the assets it invests in, the risks involved, and the conditions required to achieve the advertised return. Higher potential returns generally come with greater risk, making it important to understand whether the additional return adequately compensates for that risk.
Investors should also consider who is offering the investment. Before putting money into any financial product, it is important to establish whether the institution offering it is licensed and regulated by the relevant authority. For example, banks and deposit taking institutions are regulated by the Central Bank of Kenya (CBK), while fund managers, investment advisers, stockbrokers and collective investment schemes operate under the regulatory oversight of the Capital Markets Authority (CMA). Investors can therefore verify whether the institution or product they are considering is licensed by the relevant regulator before committing their funds. This is particularly important as the growing number of investment opportunities has also made it easier for unregulated or misleading investment offers to reach the public.
However, regulation should not be mistaken for a guarantee of returns. Being licensed and regulated provides an important framework for oversight and investor protection, but it does not mean that an investment cannot lose value. Investors must therefore still understand what they are investing in, where the returns come from, and the risks involved.
The growing range of investment opportunities means investors have more choices than ever before. This makes financial literacy increasingly important. The objective should not be to find the investment promising the highest return, but to understand the relationship between risk, return, liquidity, regulation, and one’s financial objectives. A return is only the outcome. The more important question is what lies behind it.
