Popular financial expert, Kalu Aja, recently took to his Twitter page to explain why investing in mutual funds are beneficial. He explained that mutual funds offer good investment plans for a whole lot of reasons, including the opportunity to diversify one’s investments.
Below are his words, culled from his Twitter page with illustrations and analysis of how mutual funds work.
A Mutual Fund is a Trust or Company that pools money from many investors and invests in specified class of securities such as stocks, bonds, real estate or a balanced mix of asset classes. #FinPlanKaluAjaMutuals
— Financial Planning (@FinPlanKaluAja) July 1, 2019
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 to the Mutual Fund. That’s the theory part done.
Why mutual funds? Because of diversification. Want to buy a good share, which will you buy? Nestle has great brands, Zenith makes great profits. A mutual fund allows you own Zenith and Nestle at the same time with one investment.
A mutual fund also allows you handover your Nestle and Zenith shares to a professional fund manager to look after on your behalf, collect dividends and attend Annual General Meetings on your behalf. Mutual funds are “outsourced” investing.
My favorite Mutual Funds are index funds. Index funds are set up to track (and buy an index) So instead of buying just Zenith and Nestle, you buy the whole Nigerian Stock Exchange, with just one investment Why? Again diversification
[READ FURTHER: A guide to how Mutual Funds work in Nigeria]
Diversification? Spreading your bets: If Nestle and Zenith both fall in price, you still own Dangote Cement and Presco… So you are buying and owning lots of shares when you buy a mutual fund but also an index fund. Any other reason? yes.
Cost: When you buy shares your broker charges you a brokerage fee plus Nigerian Stock Exchange fees. So if you buy individual stocks, you pay fees per individual trade… However, buying a mutual fund or index means you are “averaging” your costs
So the question is not really ” Which Mutual Fund do you want to buy?” but “What is your investment objective, risk profile, and duration of the investment?”. Answering that question tells where you should invest.