Investment groups are great vehicles. They provide financial freedom in ways you cannot imagine. However there is one common error that has led to death of many an investment groups – the misconception that equality of contributions equals equality of commitment.
Let us interrogate this notion. If Jane Doe earns Sh200,000 every month and John Dee earns Sh20,000 and yet they each invest Sh10,000 every month into their chama , who has more commitment?
The correct answer is John. He gives 50 percent of his monthly income as his contribution while Jane give five percent of hers. You see the reason you cannot measure commitment with equivalent cash contributions is because Kenya is not a communist state so the harsh reality is; there is someone who earns more than you do and somebody else less than you do. This therefore implies that if a fixed amount is seen as the solution you will not have equal commitment because some will be contributing more than they are willing to lose and others what they consider a night out in town.
Commitment should be measured in terms of percentages. A minimum amount should obviously be set but a percentage of one’s income say 15 percent should be the prescription for this commitment dilemma. Remember if one is contributing what they cannot afford to lose then they will take the investment group seriously.
The other fear shareholders have is that one person will control the group if they are allowed to contribute more than the minimum. This again is a misconception. If a group of 20 members has eight people who contribute Sh10,000, five contribute Sh15,000, five contribute Sh20,000 while two contribute Sh50,000 the smallest shareholders who contributed Sh10,000 would have a three percent shareholding while those who contributed Sh50,000 would have 14 percent. A 14 percent shareholder cannot control the company but a 51 percent shareholder can. The latter is very unlikely to happen in the investment group. So the real question is; does one want to be a 10 percent shareholder of a Sh10,000,000 portfolio or a one percent shareholder of Sh500,000,000 portfolio?
The biggest reason why equality of contributions spells a death sentence for an investment group is that, it limits the company’s ability to raise capital. Capital is as important to the investment group as oxygen is to the human being.
If Jane of above can contribute Sh50,000 monthly the investment group has Sh40,000 extra in capital monthly, therefore can trade in more deals which in turn makes the portfolio larger allowing for more leveraging that will give higher return on equity and make more money for the investors. To sum it all up, a big fat cheque for everyone.
(Origins Investment Group Advisors [email protected] www.originsiga.com)