If there is one simple, easy and less complicated way of investing in the financial markets, it is through Mutual funds. It gives an opportunity to just everybody to take advantage of the benefits derived from investing in the capital market, money market and the fixed income market through one instrument, even if you don’t have the sophistication and money to invest in these markets.
This is why mutual funds are very popular in developed markets of the world such as the United States of America where studies show that 96 million people or 44% of household have mutual funds investment. Indeed, the American Mutual Funds Industry was estimated at US$19.2 trillion in 2016 and accounted for approximately 50% of global open-ended funds assets.
Nigeria, however, is a sharp contrast, as the mutual funds industry is still developing with about 63 funds valued at NGN400 billion (approximately US$1.3 billion) offered by 50 investment firms as at end 2017. In terms of investor profiling, there are less than 300,000 unit holders most of whom are institutional investors like pension funds administrators, insurance companies and other organizations. From this data, I see two things:
The first is an industry that holds much promise for retail investors in Nigeria, especially when you consider the fact that many of the funds available in the market make attractive return on yearly basis. In fact, some funds beat the general market in terms of returns. In just five years, the net asset value of the mutual funds industry grew by 294%.
The second thing I see is an industry that is grossly under utilized by the class of people it is ordinarily designed to serve because of lack of understanding.
If you are that average guy who has little or no investment knowledge or does not have sufficient money to invest in the securities that you have always wanted, you should be interested in mutual funds because it is the only investment scheme that gives you the opportunity to invest in a diversified portfolio of stocks, bonds, treasury bills and even properties with small amount of money and without having to bother yourself with the intellectual work that is associated with these investments. That burden is taken off you by a professional fund manager.
In this post, I aim to provide you with that knowledge to help you understand why you should start investing in mutual funds by highlighting:
- What Mutual Funds Are
- Major types and classes of mutual funds
- Benefits of mutual funds investment
- How you can invest and make money
- The best mutual funds in the Nigerian market
- What to consider before you decide on a fund to invest in
I want you to relax, enjoy this post and thank me later.
How You Can Make Money by Investing In Mutual Funds
You make money through distribution of income and growth in the Net Asset Value of the funds. Depending on the type of fund, income are distributed periodically say half-yearly or annually. When you wish to exit, the net asset value shall be calculated based on current performance to determine the price.
But first, What Are Mutual Funds?
Mutual fund is a type of collective investment scheme under which a professional funds manager pools money from different people and institutions in exchange for units in the funds for the purposes of investing in a specified asset or classes of assets. The funds manager is usually an investment management company licensed by the Securities and Exchange Commission to provide fund management services and having the right compliment of skills and experience in managing funds.
Mutual funds typically invest in financial assets such as stocks, bonds, money market instruments like treasury bills, certificates of deposits, or a combination of these and other cash alternatives. Every mutual fund has an investment strategy which is communicated in the prospectus. The investment strategy often outlines what the objectives of the fund are and what kind of instrument or asset class it will invest in.
Returns on these investments are distributed amongst the unit holders in proportion to units held after taken out cost of administering the fund or the fund managers’ fees.
Mutual Funds Types
There are two broad categories of mutual funds; these are the Open-ended funds and the closed funds. An open-ended mutual fund is one in which there is no limit to the number of units to be issued. Shares or units are created and redeemed as necessary as the fund manager will usually issue new shares to a new investor based on the Net Asset Value and redeem it when the investor wants to sell. Most mutual funds in the market are open-ended.
In contrast, a closed mutual fund is one in which there is a limit to the number of shares or units issued. The set number of shares is usually offered in an IPO and thereafter listed to be traded in the open market like regular shares. A typical closed ended fund being so traded is the Skye Shelter Fund.
Mutual funds further exist in different varieties depending on the investment objectives and strategies of each fund. Thus, we can easily identify:
Equity Funds: These funds invest primarily in the stocks of quoted and unquoted companies. Equity fund managers adopt different strategies based on the objectives of the fund. Some may focus on growth while others may focus on dividend. Investing in equity funds afford you the opportunity of owning part of the shares of top companies that you ordinarily would not have been able to buy were you to invest directly. As is usual with investing in stocks, price fluctuations may affect the NAV of an equity funds.
Money Market Funds: Money market funds invest in short dated money market instruments such as treasury bills, certificate of deposits, banker’s acceptances and commercial papers. The underlying assets of money market funds are safer investment with lower returns than what could be obtained from equity market. As a result, the NAV of these funds are also lower but offer more security of investment.
Fixed Income Funds: These funds invest in debt securities such as FGN Bonds and investment grade corporate bonds. Like money market funds, fixed income funds may offer lower returns on investment but are very safe because FGN bonds are backed by the full faith of the federal government, so you can be certain that your capital invested is preserved in addition to a regular income on your investment at fixed intervals.
Balanced Funds: These funds invest in a combination of equities, money market and fixed income to offer an aggressive growth in investment, balanced with the safety associated with money market funds as well as earn regular income that is the benefit of fixed income investment. Balanced Mutual Funds managers usually will develop fund allocation formula to achieve the objective of the fund. This type of mutual fund will usually give higher returns than money market and fixed income funds but a lower return and less volatility than equity funds.
Ethical Funds: These funds are structured to appeal to investors who are concerned about where their monies are invested due to their personal and particularly, religious beliefs. Ethical funds may not, for example, invest in the shares of companies involved in the production of tobacco, alcohol, and weapons or involved in gambling as these could be repugnant to some religious beliefs.
Real Estates Funds: These funds invests in real estates and properties
Exchange Traded Funds: These funds are structured to track the performance of major indexes such as the NSE All Share Index and other sectoral indexes in the market.
Benefits of Investing in Mutual Funds
Some of the benefits you derive from investing in mutual funds are that you have access to the services of professional management firm, a service you may not have been able to afford if you were to invest directly. Another advantage is that you share the risk of investment with thousands of other people, hence the magnitude of loss could be minimal should the market adversely affect the fund. Again, you derive the benefit of investing and benefiting from a widely diversified portfolio that ordinarily would have been very difficult for you if you were to invest directly. To invest in mutual fund is easy and requires no complicated processes.
Mutual funds also provide liquidity to the investor. Liquidity refers to the ease with each you can convert your investment to cash by selling it.
The flipside is that you may also lose money if the market moves against the portfolio manager because it is an investment and investment is associated with risks.
Also Read: Your Best Investment Options In Nigeria
How You Can Invest
Investing in a mutual fund is as simple as picking your phone and call your preferred fund manager and have the forms mail to you. You fill the forms, indicating the number of units you wish to buy, write out your cheque and mail back or paid to named bank account and advice the fund manager as appropriate. Your investment will start running in few hours.
You can also visit the website of the Fund Manager and follow the process of investing in your preferred funds.
However, where you will have to do some work is in deciding which funds to invest in or which fund manager to work with. In selecting a mutual fund to invest, you will have to consider the following:
- Type of fund – you have to decide whether to buy money market funds, income fund, equity or balanced, etc. Your decision will be guided by your investment objective? Are you interested in growing your income, safety of your money or you simply wish to earn some income on a regular basis.
- Having decided on the class of fund to invest in, the next is to check the historic performance of the funds available and narrow your choices based on which you believe is performing best.
- Consider the price
- Consider the minimum investment you have to make. Some funds require you make as little as NGN5,000 minimum investment while others may require as much as NGN100,000. It will really depend on how much is available to you for investment and what you wish to achieve
- Who is the fund manager i,e the investment company? What is their pedigree in the market, how has their funds performed vis-à-vis other funds, what’s their reputation like?
- What are the charges? Are there hidden charges. This is important to ensure that your return is not swallowed by management fees and all that.
- Finally, consider funds that fall within your risk acceptance criteria.
In a report by Business Day Research and Intelligent Unit (BIU), the following funds management companies were identified as the top 10 firms in terms of transparency. FBN Capital, Axa Mansard, Vetiva Capital, ARM, Lotus Capital, FCAM, Stanbic Ibtc, United Capital, Meristem and Investment One.
For a list of approved investment companies with mutual funds in the market, see here.
With about 12 funds in the market cutting accross fund classe, Stanbic IBTC is reputed to have some of the best perfoming funds. Most of its funds are also very popular as they deliver superior returns to unit holders consistently. You can check out their website for detailed information about their funds.
Mutual funds investment is not a get rich quick type investment but a sure way you can create an enduring wealth that you can bequeath to your children if you get it right.