File: Market women

By Lillian Olubi

Following from our previous end of year write up on the steps to improve your investments for 2020, I hope it’s been a good start with maintaining the financial discipline advised.

Two important things highlighted were the need to commit to an investment plan and diversify your asset classes, so I thought it was important to build on that by starting a series sharing some ‘all you need to know’ basics on existing capital market opportunities.

A lot of people think only of equities (which we’ve taken time to dissect in previous editions) when they think of capital market instruments, but there are several other opportunities and today, we will be looking at Mutual Funds; What it’s all about, its advantages and how you can best optimise your investments with them.

Mutual Funds

Putting it in simple terms, Mutual Funds are a type of financial instrument, operated by professional investment managers, that pools money from the investing public and uses that money to buy other securities.

The fund manager allocates the funds’ assets with an attempt to produce income or capital gains for the investors and the value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a Mutual Fund, you are buying the performance of its portfolio.

Investing in a share of a Mutual Fund is different from investing in equities shares of a company. A share of a Mutual Fund represents investments in the different securities of the fund.

A Mutual Fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus and because investors have varied interests and objectives, there are funds for nearly every type of investor or investment approach. Some common types of Mutual Funds that exist in the Nigerian market include Equity funds, Money Market funds, Sector or Real Estate funds, Balanced funds, Index funds, and more recently, Equity Traded funds.

Mutual Funds have been the retail investors’ vehicle of choice for several reasons including the following:

Professional Management

A primary advantage of Mutual Funds is that it saves the investor the stress and risk involved in having to pick stocks and manage investments. Instead, a professional investment manager takes care of this using careful research and skilled trading.

Investors purchase funds because they often do not have the time or the expertise to manage their own portfolios, or they don’t have access to the same kind of information that a professional fund has. A Mutual Fund which usually requires low investment minimums is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

Diversification

Buying a Mutual Fund can achieve diversification cheaper and faster than by buying individual securities. Larger Mutual Funds typically own several different stocks across different industries. It is especially a benefit to investors who have smaller amounts of money and cannot achieve this investing directly.

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Easy Access

Mutual Funds can be bought and sold with relative ease, making them relatively liquid investments. A lot of the asset management firms that offer them, now have apps that allow you to make the purchases directly from the comfort of your spaces through your mobile devices and also give the opportunity to sell off in the same way.

Economies of Scale

Mutual Funds also provide economies of scale. Buying individual securities at a time leads to larger transaction fees whereas buying a mutual fund spares the investor of the numerous commission charges needed to create a diversified portfolio. Again, it is particularly useful for investors with smaller amounts of capital.

Variety

Investors have the freedom to research and select from managers with a variety of styles and management objectives. For instance, a fund manager may focus on value investing, growth investing, ethically conscious companies, or want a mix of varied securities. This variety allows investors to gain exposure and provides opportunities for investment that may not, otherwise be directly accessible.

Transparency

Mutual Funds are subject to industry regulation that ensures accountability and fairness to investors.

Notwithstanding the above, it is important for investors to enquire about the ease and time limits of exit, the trading strategy and pricing methods and also the frequency of reporting to ensure that they are well carried along.

In addition, unlike stocks, Mutual Fund shares do not give its holders any voting rights.

As often pointed out, a well-diversified portfolio is a cushion against shocks and extremely key in asset allocation. Your portfolio should be spread across various asset classes that reflect your risk tolerance and return expectation. Investing in Mutual Funds has been on a steady increase in recent years and can be very useful in achieving the diversification objective.

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