Mutual funds are growing rapidly and are quickly becoming the default destination for Nigerians interested in savings. Just as the pension funds began to take off a decade ago, now mutual funds are growing fast. Experience shows that the Funds would likely become the hub for investment in the Nigerian securities market.
It is understandably, mutual funds provide access to investment markets by pooling your money with the money of several other individuals with similar investment goals. 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 fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds, treasury bills among others. Each investor in a mutual fund scheme owns units of the fund, which represents a portion of the holdings of the scheme. The securities are selected keeping in mind the investment objective of the scheme. Mutual funds are managed by asset management companies and regulated by the Securities and Exchange Commission (SEC).
On the advantages/benefits of investing in mutual funds, stakeholders in the Nigerian capital market said “Diversification, Mutual Funds spread their holdings across various investment vehicles, reducing the effect any single security or class of securities has on the overall portfolio. Because mutual funds contain hundreds or thousands of securities, investors are less affected if one security underperforms.
Professional management, mutual fund accounts are managed by qualified professionals. These professionals invest only after careful analysis of the performance and prospects of different securities. It is a continuous process that takes time and expertise which will add value to your investment.
They are obliged to follow strict regulations designed to protect investors; affordability, as a small investor, you may find that it is not possible to buy shares of larger corporations. With Mutual Funds small investors can get started because of the minimal investment requirements; liquidity, with open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares.
The process is standardized, making it swift and efficient; and transparency, as a unit holder, you are provided with regular updates, for example daily NAVs, bid and offer prices as well as information on the fund’s holdings and the fund manager’s strategy.
Managing director of Sofunix Communications and Investment Limited, Mr Sola Oni said “At the core of mutual fund is diversification and professional management of investment by the fund manager. An Investor’s shares in mutual fund represents his part ownership and income that the fund generates. In the United States, mutual fund accounts for the largest investment in equity.”
He said mutual funds are usually targeted at Pension Fund Administrators (PFAs), Insurance Companies, Cooperatives, Institutional and Individual Investors among others.
He explained that “Mutual funds provide liquidity for Investors. An investor in an open-ended fund can take advantage of rising share prices to realize his profit. Investment in the fund can be used to hedge against inflation. The fund also provides opportunities for steady income and capital appreciation. The fund is used for diversification. Investment in mutual fund is safe. One can invest in smaller denomination. The processes for acquisition is quick and hassle-free. It is tax deductible and payment is automated. it can be easily planned in consonance with one’s investment objective and can be a one- time investment.
“One can invest in the fund through the Fund Manager or a securities dealer. This is where consultation with securities dealers commonly called stockbrokers becomes imperative for sound investment advice on processes and procedures for participation in the scheme. They conduct research and do a lot of analysis to be on track with upcoming changes.”
He noted that every Investment has its risk element but the important thing is that the benefits should outweigh the risk, saying “This is called the risk and return trade off. Some investors belief that investment in mutual fund causes dilution of holding. Some perceive high cost of management, especially, when one invests in many mutual funds and the so-called exist load.”
According to him, no matter the state of economy, every investment has both upside and downside. The key issues for every investor are the investment objectives, risk tolerance, time horizon and source of fund. An investor requires professional advice from securities dealers in this regard.
“Minimum amount for investment in mutual fund is not cast in iron. But the price is usually N100 or its equivalent in foreign currency and at par. For instance, Futureview Asset Management is currently offering two mutual funds. They are Futureview Dollar Fund and Futureview Equity Fund. Futureview Dollar Fund which is targeted at both Nigerians in diaspora, foreign investors and those in the country is 15,000 units at $100 per unit while Futureview Equity Fund comprises 5,000,000 units of N100 each, both at par.”
As an investor in mutual fund instrument, a banker by name Temitope Oye started putting interest towards saving for the raining days even from her NYSC days. She would start a monthly contribution into an insurance scheme with First Insurance. After her service year, she got a job with a Bank and a colleague introduced her to Cowry Wise, an investment firm that deals in mutual fund.
According to her, one of the biggest advantages of mutual funds is risk diversification. “This will reduce my risk in investment. Presently, I have a small capital and my risk intake is low. I cannot afford to lose money and this is why I prefer this type of investment rather than equities market,” she stated. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors.
Hence mutual fund risk is much lower than individual stocks.
“To me, the most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal. Also, its flexible nature is what I like, investors need not put in a huge amount of money to invest in a Mutual Fund. Investment can be as per the cash flow position. I am a monthly salary earner and I have placed my bank account on a certain amount to be put with Cowrywise for my investment every month,” she said.
“I have no regret,” Oye told our correspondent, stating that “since I have started, my return on investment has been good and I have not lost money. Investing in a good plan not only derives a good profit but also secures one’s life.
“Money invested now will lead to a safer tomorrow. Hence, one should plan an investment according to one’s needs and risk-taking capacity. The best part of the Mutual Fund is the minimum amount of investment, with as low as N1,000 and the maximum can go up to whatever an investor wishes to invest. The only point one should consider before investing in the Mutual Funds is their income, expenses, risk-taking ability, and investment goals. Therefore, every individual from all walks of life is free to invest in a Mutual Fund irrespective of their income.”