Mutual funds are fairly sophisticated investment products, and it is very common for a first-time investor to get scared; but no need to worry, in this article, we discuss all you need to know about mutual funds in Nigeria.
You can easily start your investment journey once you have a basic understanding of what mutual funds are, how mutual funds work, and which mutual funds are best to invest in.
One of the main precedencies of Mutual Funds is that they give retail investors access to professionally governed, diversified portfolios of stock, bonds, and other securities. Each shareholder, therefore, shares in the profit or loss of the fund. Let’s learn more!
What Are Mutual Funds?
Mutual funds are a professionally managed investment program. They represent a pool of funds that is controlled professionally by expert investment fund managers.
The fund managers keep a record of the performance and maturation of these funds and effect the necessary changes to ensure that the funds perform well and that the investors get the best returns.
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How Mutual Funds Work
Mutual funds work by pooling your money with other investors’ money and investing it in a portfolio of other assets (e.g., stocks, bonds). This means that you can invest in portfolios that you couldn’t afford alone because you are investing with other investors.
Mutual funds are exceptionally popular as they allow you to pick a fund that contains many stocks, monitor prospectuses, or keep up to date with industry news.
The funds offer quick diversification as they hold many stocks. The fund manager of the mutual funds selects all the investments in the portfolio. This is often an enormous selling area for first-time investors who have little experience and would preferably trust a specialist in the world of mutual funds. Because these fund managers actively manage your money, they will also charge several fees for their work.
Types of Mutual Funds
There are distinct types of mutual funds, each with its pros and cons. You can choose a mutual fund based on a diversity of different factors such as risk, return, sector, geographic area, and more. Each of these funds has its advantages and disadvantages and conditions before you can invest in them.
Money market funds. These are high-quality, brief-term (less than a year) investments in securities issued by the government, or companies. They have a minimum return because they have the least risk.
Bond funds. Otherwise known as fixed-income funds. These funds invest and trade a variety of bonds (investments in the form of debt that a company owes an investor at a fixed rate). They have lofty returns compared to money market funds but are associated with higher risks since they expose all bond funds to interest rate risks (if interest rates rise, the value of a bond fund will decrease).
Equity funds. Also known as “stock funds” because they invest in stocks of many corporations. There are three distinct types of equity funds: Large-cap (large blue-chip corporations like Dangote), mid-cap (companies that are not giants but also not start-ups), and small-cap (smaller companies).
Equity funds are the most unstable, with their worth rising and falling from time to time sharply over a brief period. Not all equity funds are the same. Some equity funds include:
- Growth funds that offer the potential for enormous capital growth but may not pay a steady dividend
- Income funds that invest in stocks that pay steady dividends
- Index funds that try to track the performance of a specific market index.
- Sector funds that typically specialize in a specific industry segment, such as finance, healthcare, or technology
Hybrid funds. It is a mix of equity, and fixed income, and other investments. Many of these funds can be invested in other mutual funds.
Not only does this give the fund the attraction of less risk, but it also offers relatively decent returns for investors who are just starting or who need a tailored approach. The appeal of a hybrid fund lies in the portfolio’s diversification, and the ability of the funds to distribute assets in distinct ways across the investor’s entire ownership of the fund.
Hybrid funds assume the risks of the funds together within the fund’s portfolio. If the fund has a higher mix of bonds than equities, there is a higher bond-specific risk in the fund and vice versa. Both equity and fixed-income funds can specialize in either domestic (Nigeria) or international investments. Global diversification can be as important, if not more important, than diversification between equity, bond, and money markets.
What are open and closed mutual funds?
Open-Ended Mutual Funds are funds open to steady issuance of shares to investors. The operators of the fund continue to give shares to the public to buy into the fund.
Investors in the fund who no longer wish to take part sell their shares back to the fund at the existing net asset value. You can also reinvest in the funds.
Closed-Ended funds are funds with a few shares sold during IPO. Once the IPO is complete, the fund will complete the sale of its shares to the public. As it is a regulated fund, they trade the shares on the stock exchange like the shares of any listed company. So if an investor concludes that he wants his money back, he just has to put up his shares for sale. The share price of a closed fund is determined both by the value of the portfolio and by investors’ attitudes to supply and demand.
What’s best for me?
This is a matter of personal decision, and willingness to take risks. Closed-ended funds are regulated by both the Securities and Exchange Commission and the NSE. They adhere to the rules laid down by the supervisory authorities.
Your share price is published daily in the newspapers and can also be found on the internet. Open Funds are mostly unregulated and are not traded on the trading floor. They are usually listed on the stock exchange by respected organizations with a record for performance.
Advantages/Benefits of Investing in Mutual Funds
Diversification – Mutual Funds diversify their holdings in various investment vehicles, thus reducing the effect of an individual security or asset class on the total portfolio.
Professional Management – Mutual Fund accounts are managed by certified professionals. These professionals invest only after careful analysis of the accomplishment and possibilities of various securities.
Regulations – Mutual funds must be registered with the Securities and Exchange Commission.
Affordability – As a retail investor, you may find that it is not workable to buy stocks from larger companies. With mutual funds, small investors can start because of minimal investment demand.
Liquidity – With open-end funds, you can withdraw your investment in whole or in part and receive the current value of the units.
Transparency – As a shareholder, you will receive regular updates, such as daily NAVs, bid and ask prices, and information about the holdings of the fund and the strategy of the fund manager.
Wrapping Up
Mutual funds are not tax-free and compare the return that a mutual fund proposes to the returns that can be realized with risk-free investments such as treasury bills. We hope we have been able to clear your doubts about investing in mutual funds in Nigeria.
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