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Mutual fund investments success in American and what Nigeria can learn from this

The popularity of mutual funds and the part they play in retirement savings has long been embraced all over the world except in Nigeria.

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Mutual fund investments

The popularity of mutual funds and the part they play in retirement savings has long been embraced all over the world except probably in Nigeria. One particular country where mutual funds have become a household name is the United States of America. According to the January 2019 edition of “focus on Funds”, a publication by the Investment Company Institute (ICI), 44% of US households or about 56 million American households own mutual fund investments.

In an interview with Sarah Holden, senior director of retirement and investor research at the Investment company Institute, she stated that most of those who own mutual funds investments are the Generation X and Baby Boomers, as they represent those that have been on their job for a while, who have saved or are saving for their retirement and were introduced to investing early in life.

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A little more than a third of mutual fund investors in the US are Gen X while a little less than another one third are baby boomers. Because most of those baby boomers and Gen X investors have been saving for quite some time, they own a lion share of the total mutual funds’ investments. For those baby boomers and Gen X investors, mutual funds are their nest egg-borne out of a lifetime of savings. Generation X are those born between the early 1960s and late 1970s, while the baby boomers are those born after the second world war, from early to mid-1940s to early 1960s.

On the other hand, she noted that among younger households, the millennial households, fewer of them are engaged in mutual fund ownership compared with the baby boomer generation and Generation X. However, she pointed out that 4 in 10 of the millennials already have mutual funds’ investments. Some of the reasons why the millennial generation is not into mutual fund investing as much as the Gen X and Baby boomers, according to Sarah Holden include the fact that they are at the early stage of their life cycle, they are young, just starting their careers and/or just starting their families. In addition, many of them are just being introduced to investing.

According to the Investments Company Institute’s Research Perspective on Characteristics of Mutual Funds Investors, which formed the basis of the interview with Sarah Holden, most US mutual fund investors invest in mutual funds through a variety of channels, which then impacts the types of funds they invest in. While 80% of them own mutual fund investments through workplace retirement plans, like 401K – a form of defined contribution plan like the Retirement Savings Accounts in Nigeria.

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63% of those that own mutual fund investments purchased funds outside of and/or in addition to those workplace retirement plans. Other discernable and important characteristics of US mutual fund investors, according to the publication, are that 62% of those households that own mutual fund investments are headed by individuals aged between 35 and 64 while 75% of those heading such households were either employed full time or part-time. In addition, the report found out that 82% of those owning mutual fund investments have investments in more than one fund while 88% of them own equity funds.

Interestingly and most importantly, the survey discovered that almost all mutual fund investors were focused on retirement savings as 93% of mutual fund-owning households indicated that retirement was their primary goal for owning mutual funds.

Morals of this Survey for Nigerians

I remember in those good old days, after reading or being told a story, usually folklores, the last piece is usually the morals of the story, as in, what can we learn from this story. When an American digresses with a story, he gets back to his point by saying, “I said that to say this”, then you know he is getting ready to tell you the “moral” of the story that caused the digression. So, the result of the survey as published by the Investment Company Institute (ICI) presents Nigerian investors with some morals:

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Start to save early and save for a lifetime

As indicated by the publication, the Gen X and Baby boomers have saved for a long time and as such have accumulated so much as to constitute the majority of mutual funds value in America.

Introduce people to investing

The report indicated that the Gen X and Baby boomers were introduced to investing and they embraced it. The millennials are also being introduced to investing. The Nigerian government, as well as the brokerage firms and fund managers, should introduce the populace to the virtues of investing and the need to save for retirement by constantly engaging in various financial literacy programs. One major thing that has led to the popularity of mutual funds investing as a means of saving for retirement in the US is the tax benefits that come with it.

With a 401K contribution, for example, you are not required to pay PAYE taxes on such contributions as long as they are within the confines of the regulation. By the time you retire and start making withdrawals from the retirement account, you are taxed, in most cases, at a lower tax bracket. By so doing, the government is helping you to save.

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Take advantage of the voluntary contribution of retirement accounts

Though the report says that most of those mutual fund investors invested via workplace retirement accounts, many others invested outside of those workplace retirement plans. In the same way, Nigerians have the opportunity for voluntary retirement contributions, as much as possible, take advantage of such opportunities and save.

Be Retirement Conscious

The survey report has it that 93% of mutual fund owners indicated that their purpose was to save for retirement. Nigerians should borrow a leaf from this indication. Gone are the days when parents depended on their children to take care of them when they retired. With the current level of un- and under-employment, and the effect of modernisation on children these days, the goal of being taken care of at old age by children seems very fleeting and unrealisable.

Increase the popularity of mutual funds

Mutual funds have been in existence in Nigeria since 1991 but its popularity is nothing to write home about. There is a lack of transparency and diversification among Nigerian mutual funds. It is easier to find out the daily prices of mutual funds in Ghana than in Nigeria.

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Prices are so stale and there are no factsheets and means of measuring performance among many funds. Mutual funds from financial giants like Zenith bank and UBA are the worst when it comes to transparency. They hardly publish their daily NAV as required by the regulations.

Even the Security and Exchange Commission, SEC, lacks the will to publish the weekly NAV Summary Report on a timely basis. The last of such publication was for November 2nd, 2018. All these lack of information have contributed to the lack of interest by investors in mutual funds in Nigeria. It is high time the fund managers began to motivate investors with timely and accurate data and information on mutual funds as they know, investment decisions are data and information-driven decisions.

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Patricia

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

2 Comments

2 Comments

  1. Anodebenze

    January 21, 2019 at 4:33 pm

    What I really want to talk is aimed for manu and it is relevant to uche.The word and the choice of words, is alive like God,himself is alive.when you write you must have a purpose on what you’re writing,secondly you must target your audience.thirdly nobody can claim to have seen God.
    sometimes it maybe better YOU’RE RELEVANT THAN BEING IMPORTANT,when you’re relevant it reveal who you are.it reveals your personalities.it reveals your powers,also your power of intellect.it also reveal your ambition and whether your are respect ed.reasoning is like a controlling rod in a mass of energy.e.g if you put a purified uranium into a container.it will radioactive.why uranium is radactive,it will also emit energy,WHICH IS HARMFUL TO THE HUMAN BODY,CAN THIS HARMFUL ENERGY BE PUT INTO USEFUL.IT CAN BE DONE.reasoning itself have power.
    A PURIFIED URANIUM CAN DRIVE A TURBINE ,hence it can generate electric,it can also be use as an agent of mass destruction in atomic bomb.so what you write. it is very much alive,you should be more positive,there is no absolute truth in our planet.what we have in our planet is political truth.
    Mutual fund grew in America,because there was liquidity and is still.we have no need for us to learn from the americans.once Nigerian economy grows,mutual fund,equity fund will grow because the conditions present itself.be original in your writing,when you borrow other reasoning in your writing,it betrays,you have a slave mentality.you cannot influence anybody

    • uchenna Ndimele

      January 22, 2019 at 2:37 pm

      Thank you for your well thought out comment. Agreed that if the right environment is provided, mutual funds will grow and that is what the article is talking about. We as a people should form the habit of saving and investing for the future and not the luxurious boastful showmanship that Nigerians are known for. It is not a show of slave mentality like you said, the article is rather saying that if it succeeded in America, it can and should succeed in Nigeria. All that we need is the will to make it succeed. Thanks and keep the comments coming

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Currencies

DEVALUATION: CBN updates website to official rate of N360/$1

The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

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Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

The CBN has updated its website with the official exchange rate.

Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

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Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

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Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

Patricia
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Career tips

Investment options for salary earners

Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages

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Investment options for salary earners - bank loan

Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

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Get life insurance

Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

[Read Also: Understanding the risks in bond investing]

Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

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Prepare for financial emergencies

Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

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[Read Also: Understanding the risks in bond investing]

Know your risk appetite

As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

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Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

[Read Also: Important tips on how to profit in a bearish market]

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Set your Investment objectives/goals

Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

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Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

[Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

Decide on asset allocation

Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

Decide on how to invest

There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

[Read Also: How I Would Invest My Mother’s Retirement Funds]

It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

Patricia
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Business News

Atiku kicks as Buhari spends $3.7 billion in foreign debt service since 2015

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Budget: FG completes just 31.7% of constituency projects, Nigerians react to President Buhari's signing of Finance Bill 

The Buhari led government has spent about $3.7 billion in foreign debt service since 2015, one of the highest from any democratically elected government. The highest single-year foreign debt service was in 2006 at $1.79 billion.

About 68% of Nigeria’s foreign-denominated debt servicing is in commercial Eurobonds issues over the last two years. The loans range between 5.1% and 9.2% per annum. Nigeria’s external debt stock stood at $27 billion in June 2019.

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Rising debt service: The Buhari administration has so far spent about $1.1 billion in foreign debt service this year. In 2018, the government spent about $1.4 billion in debt service, more than 3 times the $444 million it spent servicing foreign debts in 2017. The rising cost of debt service is a direct attribute of the government’s reliance on foreign loans as a means of funding government expenditure.

Debt service since 2003. Source: CBN. Nairametrics Research (C)

Foreign Loans: Nigeria’s fallen revenue following the crash in oil price has allowed President Buhari to rely mainly on foreign loans to fund government expenditure. As of June 2015, Nigeria’s foreign loans were about $10.5 billion mostly made up of multilateral and bilateral loans.

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However, by June 2019, total foreign-denominated loans were $27 billion with $10.8 billion made up of Eurobonds. Commercial loans which include Eurobonds and Diaspora bonds make now make up about 42% of total foreign borrowings.

[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Critics of the government have complained about the government penchant for debts believing that it could put the future of younger Nigerians in jeopardy. Supporters of the government, however, believe the borrowing was necessary to invest in critical sectors of the economy particularly infrastructure.

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Recently, Director-General of MAN, Segun Ajayi-Kadir expressed worry about Nigeria’s rising debt.

“….the rising debt profile of Nigeria continues to be a cause for concern, especially the capacity of government to effectively service it and, at the same time, meet the bursting needs and aspiration of the citizenry going forward.” 

“Already, our budget projections for 2020 anticipates a debt service sum of 2.45trillion, an amount higher than the 2.14 trillion earmarked for capital expenditure. 

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“And even though our debt-to-Gross Domestic Product (GDP) ratio, which currently stands at 28 percent, is still below the average in Africa, our revenue-to-GDP ratio remains low.”

The Finance Minister Zainab Ahmed however, believes the current debt profile is sustainable, comparing it to our GDP.

“Currently, Nigeria’s debt is at N25 trillion; that is about $83 billion. And at $83 billion, we are just at 18.99%…so 19% debt to GDP. I hear people say Nigeria has a debt problem. We don’t have a debt problem. What we have is a revenue challenge and the whole of this government is currently working on how to enhance our revenues, to ensure that we meet our obligation to service government as well as to service debt.”

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[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Former Vice President and defeated PDP Presidential aspirant, Atiku Abubakar during the week piled criticism on the government’s borrowing.

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“I have said it time and again. The business of government is too serious to be left in the hands of politicians. We must all ask questions because if they throw away the future, it is not going to be their future they are throwing away, it will be all our futures.

“The fact that Nigeria currently budgets more money for debt servicing (N2.7 trillion), than we do on capital expenditure (N2.4 trillion) is already an indicator that we have borrowed more money than we can afford to borrow. And the thing is that debt servicing is not debt repayment. Debt servicing just means that we are paying the barest minimum allowable by our creditors.

What this means: Nigeria’s rising foreign debt profile should be a worry to investors and businesses and must be watched closely. The country’s ability to repay these loans will continue to be harder as it increases especially now that it is costing about 9%. The immediate risk for investors is the exchange rate which could be the first to suffer should the government struggle to repay its loans.

Patricia
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