A Mutual Fund is a Trust or Company that pools money from many investors and invests in a specified class of securities such as stocks, bonds, real estate or a balanced mix of asset classes. The Mutual Fund is managed by a professional management company who formulates and implements investment management services to the Mutual Fund on behalf of the investors.
The Advantages of Buying Mutual Funds
- Diversification: Buying one unit of a Mutual Fund allows investors the opportunity to diversify their scarce investment capital into all the assets held by the Mutual Fund. By so doing, all their eggs are not in one basket.
- Professional Fund Manager: The Mutual Fund investors outsource the day to day operations and management of the fund to professional money managers. This frees up the investors’ time and allow best practice to come to bear on the Mutual Fund Assets
- Cost Effective: Mutual Funds offer a low cost way of investing in the overall market ad economy. Owning a unit of an Index Fund, for instance, means the investor has a piece of all stocks listed in that stock exchange. The same example, buying a Real Estate Trust (REIT) allows the investor “own” a share of many properties.
How do Mutual Funds Work?
A Mutual Fund is created by a fund manager. The Fund manager specifies what kind of investment strategy the Mutual fund will pursue (e.g. buying and holding fixed income securities for dividends or Active stock trading.) The Fund manager then offers the Mutual Fund to investors to subscribe to by buying units of the Mutual Fund. The fund investors buy directly from managers. The Mutual Fund can either be set up as a closed end or an open end fund.
A closed end Mutual Fund will issue a determined number of shares of the fund at inception and will not issue any more shares going forward. Future price movements of the Mutual Fund become based on demand and supply of the shares of the Mutual Fund. An open ended Mutual Fund, on the other hand, will create and destroy shares as new investors buy new shares or sell the Mutual Fund shares respectively.
The Mutual Fund then takes these investors’ pools of funds and invests in securities as matching the stated investment objective. The fund manager builds a portfolio of assets using funds from the shares of the fund bought by the investors.
Based on the type of Mutual Fund, the investors can either get cash dividends or see the value of their shares rise. An Equity Growth Fund like the ARM Aggressive Growth Fund, for instance, will invest in shares of promising companies who have very rapid growth and reinvest their profits or cash back to fund internal growth. These type of fund will satisfy an investor seeking a Capital Appreciation objective
On the other hand, a Money market fund like the Afriinvest Plutus Fund will invest in short-term, fixed income securities. These type of funds will generate a lot of cash dividend and will satisfy an investor seeking dividend or Capital Preservation Objective.
What Types Of Mutual Funds Are There?
Mutual Funds are created and characterised according to their investment objective. Mutual Funds can be classified according to how the assets are managed; for instance – Passive versus Active Funds. Passive EFT Index funds such as the Lotus Halal Index Fund index funds are not actively traded. The Mutual Fund Managers buy the index of the stock exchange and simply rebalance their positions as desired. This is a way for the investor to gain exposure to a particular market, sector, or even nation.
Actively managed funds on the other hand like the Legacy Equity Fund will see the Mutual Fund Managers actively buying and selling shares to maximise returns on behalf of the fund investors
Mutual Funds can also be classified by the asset allocation thus;
Money Markey Funds like the Abacus Money Market Fund which invests in short term fixed income instruments
Bond Funds like the Stanbic IBTC Bind Fund which invests in long-dated fixed income instruments
Real Estate funds like the UPDC Real Estate Investment Trust which invests in property with potential for above-average growth in rentals and valuation.
Some income funds also invest in securities that pay dividends regularly. These are mostly a mixture of dividend stock, bonds, and Treasury Bills.
Mutual Funds can also have a hybrid or mixed portfolios investing in different classes of assets. for instance, a fund can have both fixed Income assets like Bonds and Variable assets like Shares. Examples of these are balanced funds like the AIICO Balanced Fund.
Target date funds also called Lifecycle funds hold a mix of stocks, bonds, and other investments in separate funds differentiated by maturity dates. Over time, the asset mix gradually shifts from variable income to fixed income in line with approaching retirement of the Fund Investors. An example of this is the Cordros Milestone Fund.
How Do Investors Make Money in Mutual Funds?
The Mutual fund Manager invests the assets of the fund in s fiduciary manner for the investors to the Mutual fund. Increases in the Assets held by the Mutual Fund will increase the price of the fund leading to Capital Gain. Some Mutual funds also pay a dividend or distribution to the fund investors. So when you invest in a Mutual Funds, you receive the same rise in asset prices and returns as if you invested in the assets directly but proportional to your holdings in the Mutual Fund.
What costs do investors pay?
The fund Managers will charge the fund a management fee for providing investment management and administration services. When a unit of the Mutual Trust is bought that offer price includes the cost of the actual asset itself but also a share of the investment fees paid to the fund managers.
How to Buy And Sell Mutual Funds
Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.
How are Mutual Funds Valued?
Every close of the trading day, each mutual fund is valued. This value is expressed as the Net Asset Value and is derived by dividing the total value of all the securities in the portfolio, less any liabilities, by the number of fund shares outstanding.
Things to do before investing in any mutual fund
- Read the prospectus, that will tell you the “constitution of the fund including the asset management goals and objectives
- Ask about fees you will pay, fees are a drag on your profitability
- Ask how the fund will manage profits? Dividend payout?
- How quickly can you get your funds if you decide to leave the fund
Do past performance matter? Past performance of any investment cannot be used as a predictor of future values, at best they can give the investor a glimpse into the operations the company e.g. how they treat cash earned.
Even small differences in fees can mean large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return, and annual operating expenses of 1.5%, after 20 years you would have roughly $49,725. If you invested in a fund with the same performance and expenses of 0.5%.
Editor’s Note: It should be noted that this is not an offer to buy or sell securities. Mutual Funds can be risky even as investors could lose invested capital. The Mutual Funds that were mentioned are for illustrative purposes not a recommendation of any sort.
In a hyperinflation economy like Nigeria’s, these are the best investments to consider immediately
A deeper review of investments to consider amid the prevailing high inflation in Nigeria.
Let’s face it, Nigeria’s rising inflation plus lower options for high yielding investments are already driving a significant number of investors away from Africa’s leading frontier market. This is coming at a time when Nigeria’s top performing investment asset class for 2020 is currently having a year-to-date return of around -3.30%.
Recent data published by the National Bureau of Statistics (NBS) reveals Nigerian inflation rate surged to a 33-month high, as it rose further to 16.47% in January 2021 from 15.75% in December 2020. This is marks 17th consecutive month of rising inflation in the country.
Consequently, Nairametrics interviewed selected financial experts on the investment options best suitable for such macro.
That being said, it’s important to note that there are no guarantees when it comes to investing during high inflation. At best, such investments may be inflation-safe, but returns can never be guaranteed.
Debo Adejana, MD/CEO, Realty Point Limited, Chairman, REDAN South West Zone.
At 16.5% inflation rate as of January 2021, the obvious is that there are very little short-term investments that can outperform that especially in the short term. So, that being said, my traditional conservative disposition of the fact that the best investment term is the long-term.
To make returns that will consistently be higher than 16.5% in short term investments will require very good knowledge of the asset class and share dedication.
If that is clear, then by my own understanding, the following are some of the possible investment areas or strategies to adopt with real estate being my most preferred asset class anytime:
- Financial player in a JV Property Development Scheme. This helps to save time and gives faster turnover of investment fund.
- Buying distressed property now, renovate, rent-out for 2years of more just to hold if necessary and sell after.
- Crowd owning/funding property deals
- Guaranteed rent discounting
- International property investment for positive cash flow and to enjoy foreign exchange appreciation
All the above can be done as a large ticket investor or little fractional holder using a well-structured and regulated vehicle.
Darlington-Morsi Onyemaka, Co-founder, Quba Exchange
Inflation means that prices for things are rising, and as such the same amount of money buys less over a certain period of time. This in itself is especially not good for cash savings as the best way to manage inflation is by investing in instruments that give you a return higher than the current rate of inflation or at least one that keeps up with it.
The best kinds of assets to invest in during inflation are tangible assets that have fundamental values and as such, their worth measures up together with inflation. These assets include real estate, growth stocks, and commodities like food, crude oil, and gold (especially gold).
On the flip side, one should avoid long-term fixed-income investments. This is because the value of the underlying security falls as investors tend to focus on higher-yielding alternatives when the interest rates of that instrument start rising.
Thelma Ugonna Ohiri-Anyanwu, CFA
Inflation is the increase in prices of goods over a period of time, where a specific amount of currency will be able to buy less than before.
In as much as inflation erodes the value of funds, this should not deter one from investing as some investment’s types are great hedge against inflation and helps to preserve capital. Some of such investments are Gold, REITs, real estate, commodities and a well-balanced stock portfolio.
Silas OZOYA, Founder/CEO SUBA Capital
Inflation in many ways affect the general health of a countries economy and her citizens literally and the only way out of inflation is continuous and increased investments in local production, expansion of existing local businesses and enacting fiscal policies that would strengthen the currency of such country.
To mitigate this, increased and persistent investment from all angles in Agriculture, local processing, and increased export would do a positive dent on our inflation rate and keep us far away from recession through job creation, wealth growth, food, and cash crop production at scale.
Nigerian’s home and abroad should consider investments that support economic growth through investments in Agriculture and agro-allied ventures.
Agriculture from my experience is one of the very few sectors that puts food on the table, employs people, and grows the value of your money against inflation all in one value chain.
The general public, high net worth individuals, and Nigerians abroad should consider holding at least 20% of their asset portfolio in Agriculture and agro-allied investments.
Angela Aya, Head, Institutional Sales at Alonati
There are a lot of investment opportunities for both the wealthy and not so rich investors in Nigeria, investors desiring to get an income or return on investment. Some are the FGN Savings Bonds, Stocks, Real Estate, Gold, Cryptocurrency, Agriculture etc. However, below are some investments that offer inflation protection:
Investment in real estate has been profitable and remains lucrative especially in Nigerian urban cities.
This investment however requires medium to high capital. Nigeria is still a developing Country in the world and the need for housing to match the Country’s increasing population size remains critical, as urban-rural migration continues to increase due to the neglect of development of the rural areas by the States and Federal Government.
The value of land and property has continued to rise and will continue to appreciate due to the margin between demand and supply as the need for residential and commercial buildings in major cities remains high.
Investing in gold has remained an agelong golden income space. The value of gold has continued to appreciate over the years because of the importance attached to it all around the world.
Gold remains an important symbol of wealth and affluence, and can be purchased as bars, coins or jewelries and resold at a higher price over time.
A disciplined investor can hedge against inflation risks by investing in the following asset classes that often outperform during high inflationary climates.
- Debo Adejina – Real Estate,
- Darlington-Morsi Onyemaka – real estate, growth stocks, and commodities like food, crude oil, and gold (especially gold).
- Thelma Ugonna Ohiri-Anyanwu, CFA – Gold, REITs, real estate, commodities and a well-balanced stock portfolio.
- Silas OZOYA – Agriculture and agro-allied ventures.
- Angela Aya – Real Estate & Gold.
Retail franchise investment next gold mine for Nigerian investors- CIG
Retail franchise investment curbs unemployment and create buffer for people looking for side hustle
The Choice International Group (CIG) has tasked both unemployed and employed Nigerians to embrace retail franchise investment, as the initiative would curb unemployment in the nation and create buffer for people looking for side hustle.
In line with a recent FBDS Study, there are over 450,000 Nigerian career professionals with minimum investible funds of N1 million, looking out for investment opportunities.
In the majority, these funds are looking for franchise type opportunities for ease of venturing and minimal failure risk.
As far as CIG chairperson, Diana Chen, is concerned, such investor should look no further but consider the group’s retail franchise investment opportunity, which offers Nigerian community mouth-watering offer of owning Gree & Lontor retail stores.
According to him, Gree is the world’s residential air-conditioner manufacturer, while Lontor provides high-quality, energy-saving and convenient rechargeable home appliances and lighting products for global consumers.
He said, “Both brands have been built by the CIG into a world-class electronic retail chain in Nigeria opening no less than 20 brand shops in Lagos and Oyo over the last 18 months.
“The sales performance of its existing stores in the country makes Gree & Lontor one of the most profitable businesses in Nigeria with yields of an average return on investment of 50% and above per annum.
“CIG is offering investors the opportunity to own any of six regional logistics centres, or any number of Gree & Lontor brand shops in viable locations across Nigeria.
“It is the decision of the company to open up these opportunities to the investing public through a Franchise Retail partnership.”
He added that the company has mapped out two investment models it says are simple, transparent, and hassle-free.
“The first model involves only six regional logistics centres located across the geopolitical zones in Nigeria.
“Whoever invests in this will require a capital outlay of $1 million, and become a mega distributor partner of the Gree & Lontor brand, and service a network of brand shops.
“The second investment model involves the Gree & Lontor brand shops – retail franchise stores that require an initial capital outlay of N20 million.
“The investor will secure a store size of 120-150sqm at any choice location, shopping mall, plazas, high streets and even residential neighbourhoods.”
What they are saying
Nigeria is a growth market for franchising and franchise development services.
Gbenga Ajayi, an Entrepreneurship analyst, said, “The retail industry comes second to the food industry among sectors with best franchising opportunities.
“As with other emerging markets, one of the challenges of franchising in Nigeria remains the strengthening of intellectual-property regimes so that franchise companies can transmit knowledge and franchise system concepts with the confidence that such know-how will be protected.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- FCMB approves FY 2020 dividend pay-out of N2.97 billion to shareholders.
- Africa Prudential Plc posts profit after tax of N381.35 million in Q1 2021.
- Sovereign Trust Insurance Plc notifies stakeholders of 26th Annual General Meeting.
- Dangote Cement Plc to hold AGM on May 26th
- Linkage Assurance Plc proposes N500million as final dividend for 2020, and a bonus issue on its existing shares.