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WHAT IS MICRO FINANCE AND HOW DOES IT WORK?
Microfinance is an effective method for promoting financial inclusion and reducing poverty. Investing in Micro Finance Institutions (MFIs) allows investors to achieve financial returns and social impact.
The Benefits of Investing in Micro Finance
One of the primary benefits of investing in microfinance with Thales Capital is the potential for attractive financial returns. Fixed-income Microfinance Investment Vehicles (MIVs) hedged in dollars have shown a positive performance for the last 10 years, without a negative year or even a negative quarter.
Furthermore, investing in these Alternative Investment Funds allows investors to support financial inclusion which has a direct impact on various social outcomes, like health, education, and gender equality. By providing access to financial services, MFIs enable low-income families and small businesses to improve their living conditions, create jobs, and stimulate local economies.
However, such investments also have their risks. Credit risk refers to the potential for borrowers to default on their loans, which can impact the overall performance of the MIV. Currency risk arises from fluctuations in exchange rates, particularly for investments in emerging and frontier markets.
Micro Finance Investment Strategies and Criteria
Investing in microfinance requires a sound understanding of the sector and the various investment strategies and criteria. Investors must consider target markets, instrument types, and risk profiles when selecting a suitable option.
Investors may focus on particular regions, like Africa, Asia, or Latin America, or opt for a more diversified global approach. Emerging and frontier markets offer higher growth potential, but come with increased risks and volatility. So, investors should carefully evaluate the political and economic stability of target countries beforehand.
Microfinance investments can be made through debt, equity, or a combination of both. Debt investments typically involve providing small business loans to MFIs, which in turn lend to their customers. Equity investments consist of purchasing shares in MFIs, allowing investors to take part in the growth and profitability of these institutions.
Like with a Master Feeder Fund, the risk profile can range from conservative to aggressive. Conservative investments may focus on well-established MFIs with proven track records, while aggressive investments may target early-stage MFIs or those operating in more volatile markets. A balanced approach may involve a mix of both conservative and aggressive investments, offering a diversified risk profile.
Micro Finance Fund Management and Fees
Active asset management is essential in the microfinance sector, given the unique challenges and risks involved. To achieve greater profits, fund managers must have a deep understanding of the local markets, regulatory environment, and specific needs of borrowers to effectively allocate capital and manage investment risk.
Additionally, investors must be aware of the fees associated with microfinance investments, which can include management fees, performance fees, and other expenses. These fees depend on the size of the investment and the complexity of the fund’s strategy.
In a nutshell, socially responsible investing in microfinance or Green Investment Funds offers a unique opportunity for investors to achieve both financial returns and social impact. By understanding the benefits, investment strategies, fund management, and risks associated with investing in such assets, investors can make informed decisions and contribute to a more inclusive and sustainable global economy.