Effect of Investment Decisions on Financial Performance of Unit Trusts in Kenya

Abstract

Prudent investment portfolio management ensures effectiveness, liquidity and safety within the use of resources among different objectives. The principal reason of holding diversified portfolio rather than a single investment is to maximize return while minimizing risk. Investment diversification is important in that it reduces the level of systematic risk incidental to a portfolio. At every decision purpose, the portfolio manager has a list of investment opportunities at hand and may decide whether to require a foothold supported market conditions and additionally the assessment of determinants. Prudent investment decisions results in enhanced return on investments. The main aim of this research was to establish investment decisions effect on performance of unit trusts in Kenya. The independent variables for the research were investment in shares, investment in fixed deposits, investment in real estate and investment in government securities while the control variables were fund size and fund liquidity. The dependent variable was financial performance measured using return on investments. The study was anchored on modern portfolio theory and supported by arbitrage pricing theory and the capital asset pricing model. Descriptive research design was utilized in this research. The 24 unit trusts in Kenya as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) on an annual basis from CMA and individual unit trusts’ annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research discovered a 0.2571 R square value implying that 25.71% of changes in unit trusts’ performance can be described by the six variables chosen for this research. The multivariate regression analysis further revealed that individually, investment in shares and investment in fixed deposits have no significant effect on performance of unit trusts in Kenya. However, investment in real estate produced positive and significant values for this study (β=0.093, p=0.001). Investment in government securities displayed a positive and significant performance influence as shown by (β=0.044, p=0.008). Both fund liquidity and size have a positive effect on performance of unit trusts as shown by (β=0.043, p=0.029) and (β=0.114, p=0.001) correspondingly. The study recommends that unit trusts should enhance their investment in real estate as this will contribute significantly in their financial performance. Further, the study recommends the need for unit trusts to increase their investment in government securities as they affect return on investment in a positive way. Future research ought to focus on other determinants of financial performance among unit trusts in Kenya.