Regardless of investors income, achieving financial goals is attainable by investing in mutual funds. Mutual funds provide investors with access to investment markets by pooling their money with the money of several other individuals with similar investment goals. By diversifying investments, mutual funds assist with minimising the potential risks typically associated with investing. Mutual funds differ to stocks as they are not traded on an exchange and investors can buy and sell through a Fund manager at any time.
Units are created and sold to new investors on a continuous basis, so you can either invest a lump sum or save on a regular basis. Mutual funds are regulated by the Securities and Exchange Commission (SEC) of Nigeria.
For example, a mutual fund can invest investors’ money in a basket of stocks. Before investing with a mutual fund, pay attention to what the fund invests in. investors invest with a mutual by purchasing units of the fund. Think of it as owning houses in an estate. Just as house owners earn through rents, units also earn returns.
The returns come in two forms: periodic distribution and capital gains. With periodic distribution, if the annual rate is 10 per cent, for instance, investors will earn a daily breakdown of that on each unit you own. This can then be distributed on quarterly, bi-annual or annual basis. This applies majorly to mutual funds that invest in money market instruments like treasury bills. Such funds are generally low-risk.
On the other hand, capital gains happen with changes in unit prices. For example, if an investor buys a unit at N1,000 and it changes to N1,100 within a year, it has gained 10 per cent. This applies more to funds that invest in bonds and stocks. They are categorised as medium and high-risk funds.
It has been noted that mutual funds are safe to invest in as they are regulated. The Securities and Exchange Commission, which is the regulatory body for investments, oversees their operations. In essence, they are legitimate investment channels. However, they are categorized according to the instruments they invest in. Examples of these instruments are treasury bills, stocks and bonds. Meanwhile, a fund can be categorized low-risk, medium-risk or high-risk, depending on what they invest in.
Within the past 10 years, the total value of mutual funds in Nigeria grew by 1,927 per cent, this is a solid progress. In 2011, the total value was N74 billion and grew to N1.5 trillion in 2020. This simply means that more people are starting to invest in mutual funds.
Speaking on investing in mutual funds, a senior broker with Calyxt Securities Limited, Mr Tunde Oyediran said mutual fund is a pool of money collected from many investors to invest in securities like equity, fixed income, mixed securities among others.
On the opportunities in investing in mutual funds, Oyediran explained that investors will be able to benefit from stocks which ordinarily he or she might not have resources to invest in; it increases dividend yield of investors; it is being managed by professionals who are under the watch of regulators; and it is safer than just buying a stock. If the stock has problem all money is gone. You put many eggs in different baskets.
He added that buying mutual funds is just like primary offer, if a new mutual fund comes out, you can contact the issuing firm. But for secondary market for existing fund, you buy through your stockbroker with your CSCS account number.
On risk on investment, the senior stockbroker said investors may get a lower yield from the pool sometimes when compared with concentrating in a particular stock.
According to him, investing in equity or fixed mutual funds depend on economic environment. The Hybrid, blending equity and debt also go with economic conditions. Many of these funds are good, but there is need to contact one’s brokers for more details. Investors can invest as low as N10,000 in buying a mutual fund instrument.
Meanwhile, mutual fund investment is perhaps the easiest way to start investing if investors are novice. And in Nigeria, there are so many funds to choose from. Rate of return may not be only factor that should drive investors decision to invest. Historical performance and credibility of the fund manager also count. Thus, funds.
Another important thing to note is that there are different types of mutual funds. Each type focusses on different asset class or a mixture of asset classes. Some are deliberately structured to appeal ethical preferences. Thus, while Equity funds invest in equities, money market mutual funds invest in money market instruments, and so on. Investors should always do their due diligence before taking any investment decision.