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Common Mistakes Mutual Fund Investors Make

Buying mutual funds of similar characteristics, is a major reasons that people invest in mutual funds is diversification.

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Mutual Funds, Mutual Fund gone bad: Nigerian investor discloses his 10 years investment that nosedived , Nigeria’s mutual fund asset value reaches N1 Trillion

One of the books I remember reading while growing up is a book called, “Common Mistakes in English”, by T J Fitikides. That book so helped my mastery of the English language that I often recommended it to my friends and enemies alike. When my kids became of school age, it was one of the books that I bought for them, although they have refused to read it as religiously as I did then.

In those good old days, while reading this book, I had thought that it was only in English language that common mistakes were likely to be made. But coming almost full circle in life, I have come to realize that there are common mistakes made in every sphere of life. One area that common mistakes are found is in the area of investing, so in this article, I have chosen one tiny bit of that investing ecosystem to talk about the common mistakes made there. That area is mutual fund investing.

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Mistake Number One: Buying Past Performance: One of the mistakes mutual fund investors make, in an attempt to make profits, is to buy those funds with highest returns. This is called chasing performance. It is, however, quite intuitive, and I have made that mistake in this past— a mistake that I am still paying for. But why is this a mistake? The main reason why buying a fund because it is ranked highest in the list of performers, is that past performance does not predict or guarantee future performance.

[READ ALSO: President Buhari assigns portfolios to all 43 ministers [Full-List]

For this reason, most mutual fund performance data providers warn those using the data that “past performance does not guarantee future performance.” Fund performance depends on such factors as economic conditions like interest rates. A fund that is up this year may be up next year or vice versa. While performance, as a decision variable, is good, it should not be the sole reason for choosing to invest in a particular fund.

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Choosing a fund should be based on a combination of factors like performance, fund manager’s credibility, management style and the fund’s strategy. Rather than buying into the past performance of high-ranking funds, it may be better to buy into conservative but consistent funds. Another reason is that, as is known in investing, the higher the rate of return, the higher the risk— “High risk, high return,” they would say. Because of the higher risks that go with higher returns, buying into high return funds based on past performance, may not align your risk tolerance and risk appetite to such funds.

Mistake number 2: Buying Mutual Funds of Similar Characteristics: One of the reasons that people invest in mutual funds is diversification. Because mutual funds are a pool or a basket of financial assets, by investing in one fund, you get proportional exposure to all the financial assets contained in the basket. However, if you invest into multiple mutual funds with similar strategies or characteristics, you may run foul of diversification.

This is even more so in the Nigerian market space where there are not a lot of securities, so a lot of mutual funds end up holding similar or even the same securities. The danger of this is that by investing in multiple funds holding the same securities, albeit in varying degrees, you encounter concentration risk. One way to avoid this mistake is to find out the correlation between the funds you are interested in. Correlation is a measure of the degree to which two things move together.

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If you are interested in two funds that are highly positively correlated, chances are that they invest in the same securities. Therefore, by investing in both, you will not only not achieve diversification, you will also be exposed to concentration risk.

Mistake number 3: Comparing Funds purely on their face value: Selecting which fund to invest in requires research and analysis. However, as noted already, many fund investors select funds without a deep perusal into what the funds invest in. It is possible to get a feel of the future performance or outlook of a fund by looking at its holdings. After all, a mutual fund is as good as the securities it holds.

[READ ALSO: Mobile money war: Telecoms threaten banks’ future in Nigeria]

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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.

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Business

CBN adds Maize importation to “41 banned list”

Dealers are to return their forms on or before Wednesday, July 15, 2020.

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CBN Bans Maize Importation

The Central Bank of Nigeria (CBN) has directed all authorised dealers to immediately discontinue the processing of Forms M for maize/corn importation into the country. This directive is contained in a notice that was addressed to authorised dealers and signed by Dr O.S Nnaji, CBN’s Director in charge of Trade and Exchange Department.

In the notice which was made available to the public earlier today, the CBN noted four main reasons for the directive to discontinue maize importation, The reasons are:

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  • To increase local production
  • To stimulate a rapid economic recovery
  • To safeguard rural livelihoods
  • To increase jobs

In line with this development, all the authorised dealers have been told to return all the Forms M they have already registered for the purpose of importing maize. They are to return the forms on or before Wednesday, July 15, 2020. The notice by the CBN said:

“As part of efforts by the Central Bank of Nigeria to increase local production, stimulate a rapid economic recovery, safeguard rural livelihoods, and increase jobs which were lost as a result of the ongoing COVID-19 pandemic, Authorised Dealers are hereby directed to discontinue the processing of Forms M for the importation of Maize/Corn with immediate effect. 

“Accordingly, all Authorised Dealers are hereby requested to submit the list of Forms M already registered for the importation of Maize/Corn using the attached format on or before the close of business on Wednesday July 15, 2020. Please ensure strict compliance.”

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What this means: Recall that in June 2015, the CBN issued a circular containing a list of 41 imported goods and services that were banned from accessing Nigeria’s official Foreign Exchange Market. A Nairametrics report at the time had noted that the ban was another hard-line position taken by the apex bank to keep control of the demand of the dollar to as low as it possibly can.

Over the years, the CBN has been modifying this list by including more items. The addition of maize/corn, which is a widely-consumed staple food in the country, is the latest modification.

It should be noted that cereals (which include maize and other assorted grains) make up Nigeria’s top ten imports. In 2019 alone, the country spent about $1.3 billion on cereals importation, according to World’s Top Export.

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You may see a copy of the CBN notice along with ‘the attached format’ by clicking here.

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CITN issues rejoinder to ICAN’s claim over court case

The rebuttal claims that there are some ‘critical misinterpretations’ contained in ICAN’s claims concerning the judgment.

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CITN

The Chartered Institute of Taxation of Nigeria (CITN) has issued a rebuttal to the “critical misrepresentations” that are supposedly contained in a notice to members sent out by the Institute of Chartered Accountants of Nigeria (ICAN) over a court case, as reported by Nairametrics.

Recall that ICAN had informed its members that Justice S. A. Onigbanjo of the High Court of Lagos State ruled in their favour by striking out “Suit No. LD/3288GCM/19 – CITN VS ICAN” which was filed by CITN. In the suit, CITN had, among other things, prayed the court to restrain ICAN members from filing tax returns with the Federal Inland Revenue Service (FIRS) unless they have a CITN license.

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CITN’s position: Now, in its rebuttal to ICAN’s claims concerning the court case, a copy of which was sent to Nairametrics, CITN clarified the following points:

  1. The Ruling of the Hon. Justice S. A. Onigbanjo of the 2/7/2020 in LD/3288GCM/19 did not invalidate the MOU and TOS because it did NOT address the issues in the substantive suit, itself. However, since ICAN has resiled from the MoU and ToS it freely entered with CITN, the CITN will not stop ICAN from walking away.
  2. The Judge only struck out the suit based on the Preliminary Objection of ICAN to the effect that the suit was an abuse of court process because the issues in it were the same as the issues in FHC/L/CS/125/2019 – ICAN VS FIRS & 1 OTHER which was earlier decided in favour of CITN.  However, the issues in the two suits are completely different and distinct as has now been explicitly admitted by ICAN in its Notice under reference when it said: “The earlier ruling at the Federal High Court in Suit No. FHC/L/CS/125/2019 did not make pronouncement on the memorandum and terms of settlement between ICAN and CITN.”ICAN having admitted  that the judgment in FHC/L/CS/125/2019 did not make any pronouncement on the MOU and TOS (and this is a fact), how then could issues in that suit be the same as those in LD/3288GCM/2019 (decided by Justice Onigbanjo) which only asked for judicial pronouncement on the MOU and TOS?
  3. Regulation 5 of the Tax Administration (Self-Assessment) Regulations, 2011, was categorically annulled by the Hon. Justice Liman in the judgment delivered in FHC/L/CS/125/2019 on 21/11/2019.  None of the lawyers to the parties (including ICAN) can deny hearing the annulment of Regulation 5 during delivery of the judgment. It is unfortunate that ICAN is jumping the gun in a case with a pending post-judgment application.
  4. In the judgment delivered in FHC/L/CS/1480/2018 – CHIEF IGBAROOLA & OTHERS VS FIRS & OTHERS on 21/5/2019, the Hon. Justice A. O. Faji, declared: “CITN Act is thus superior to ICAN Act on the issue of tax practice.  The Self-Assessment Regulations being in conflict with the CITN Act is null and void.  The Plaintiffs cannot practice as tax agents without first being members of the 2nd Defendant.”
  5. In the Court of Appeal judgement of 2013 between ICAN v. CITN, it was held that the power to regulate and control the tax profession, to the exclusion of any other body, in Nigeria lies with CITN.
  6. It is, therefore, now firmly settled from all the relevant judgements at the Lagos High Court, Federal High Court and the Court of Appeal, which have all upheld the primacy of the CITN Charter, that no member of ICAN can practice taxation without first being a member of CITN.
  7. For the avoidance of doubt, no ICAN member, who is not registered with CITN, has been permitted by any law or court decision to practice taxation. The law has made it clear about the professional body that can regulate tax profession in Nigeria and CITN reserves the right to invoke the relevant provisions against any person that violates the provisions of its charter.

The backstory: The disagreement between ICAN and CITN dates back to 2015 following a misinterpretation of a Memorandum of Understanding (MoU) and Terms of Settlement (ToS) between the two organisations. Due to the disagreement, CITN took legal actions in a bid to basically make the MoU and ToS binding on ICAN members.


You may read CITN’s full rejoinder by clicking here and follow up on ICAN’s notice to its members here.

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UPDATED: Court rules ICAN members do not need CITN license to file tax returns

The suit, which was filed some years ago by CITN, was basically struck out for lacking merit.

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ICAN

Justice S. A. Onigbanjo of the High Court of Lagos State has ruled that members of the Institute of Chartered Accountants of Nigeria (ICAN) do not need to be licensed by the Chartered Institute of Taxation of Nigeria (CITN) before they can file tax returns.

The ruling on July 2nd followed a suit filed by CITN trying to restrain ICAN members from filing tax returns for their clients unless they have a practicing CITN license.

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A notice to ICAN members regarding this development, as seen by Nairametrics, noted that Justice Onigbanjo struck out the suit after describing it as “an abuse of court process and an embarrassment to the judiciary.”

The backstory: Nairametrics understands that the disagreement between ICAN and CITN stemmed from the misinterpretation of a 2015 Memorandum of Understanding (MoU) and Terms of Settlement (ToS) between the two organisations. Consequently, CITN had filed a suit before the High Court of Lagos State, seeking the following:

  • A declaration that the Memorandum of Understanding and Terms of Service both dated February 12, 2015 between the CITN and ICAN are valid, subsisting, and binding on the CITN and ICAN.
  • An injunction restraining ICAN whether by its agents, privies, assigns, or whosoever called, from repudiating, resiling from or acting in any manner or doing anything that is inconsistent with, contrary to or is a violation of the Memorandum of Understanding and the Terms of Settlement dated February 12, 2015, between the CITN and ICAN.
  • Determine whether the Memorandum of Understanding and Terms of Settlement both dated February 12, 2015 between the CITN and ICAN are valid, subsisting, and binding on CITN and the ICAN.

However, last week’s ruling by Justice S. A. Onigbanjo which, by the way, was delivered virtually due to COVID-19, has made it impossible for the CITN to implement the terms of the 2015 MoU and ToS. The ruling also aligned with ICAN’s earlier objection to the MoU and ToS.

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The status quo: In view of this development, ICAN has informed its members that they do not need to obtain any license from the CITN before they can file tax returns for their clients with the Federal Inland Revenue Service, FIRS.

ICAN members were also informed that an earlier ruling by the Federal High Court on the case does not affect the status quo. This is because “the earlier ruling by the Federal High Court in Suit No. FHC/L/CS/125/2019 did not make pronouncement on the memorandum and terms of settlement between ICAN and CITN.” More so, regulation 5 of the FIRS Act was not reflected in the earlier judgment of the Federal High Court.

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