Investing as a group

Since the advent of independence, many African countries have explored various ways to encourage and promote savings and investments by especially low earners. These efforts have ranged from cooperative societies, microfinance initiatives and the more recent merry go rounds and investment groups.

The cooperative society whether it is for producing, marketing, saving or credit is intended to create synergy for the members. The cooperative system has been around since the 1950s and 1960s.

Merry-go-rounds
Throughout many African countries a concept has been growing in the last 10 or so years, it is called the ‘merry-go-round’. The ‘merry-go- round’ is a rotating savings group. Members collect money daily, weekly or monthly and at the end of the week or month the money goes to one member. ‘Merry-go-rounds’ do not charge interest to members and members use the money received from the group as they see fit. Some use the money for consumption or investment purpose.

The main advantages of ‘merry-go-rounds’ are that the members are encouraged to save regularly and get interest free money in lump sum when it is their turn to receive payment.

Investment Groups
Investment groups are another form of joint financial effort that is becoming popular in many African countries. Members of an investment group save money every month but instead of giving the collected money to a member like in the case of a ‘merry-go-round’, the group invests the money jointly.

Investment groups offer a number of advantages to members. Investment groups help to promote both savings and investments because the group is usually committed to regular saving and long term investing. Members who are new to investing can learn from more experienced colleagues and those lacking time to research investment options can share in research done by others. Even though members contribute little money the bundling effect enables them to buy into big investments because of working as group.

Investment group membership comes with responsibilities. First is commitment to attend meetings and hold positions like chairperson, secretary and treasurer. Perhaps the biggest challenge faced by most investment groups is the issue of values: the group is made up of members with different sets of values and it is feasible that there will not be consensus on all issues. Some groups agree ahead of time on values to be followed by the group and whenever there is conflict members agree to abide with the decision taken by the majority.

There are areas that any people who are interested in forming investment groups need to handle properly.

a) The legal form of the group. In the USA most investment clubs are registered as partnerships, mainly due to tax considerations. Other forms that groups can take are private limited liability companies and cooperative societies. When choosing a form you have to take into consideration regulatory and tax requirements for the form as well as legal protection offered by the form.
b) Accounting. Proper accounting is vital for successful performance of any investment group.
c) Investment strategy. Developing and regularly reviewing the group’s investment strategy is vital for successful group investment.
d) Group policy or rules. The group should have clear rules to address issues like joining and leaving the group, payment of dividends and member contributions.