My heart went out to one Nigerian mutual fund investor, Solomon Udoh, whose posting on Twitter formed the basis of an article on Nairametrics titled “Mutual funds: Nigerian investor discloses how his 10-year investment nosedived.” That article narrated how Solomon Udoh had religiously set aside N10,000 monthly to invest in ARM Discovery Fund, only to end up with N936, 621 after 10 years.
Following his tweets, other Nigerian investors noted with comments that they too had experienced such misfortune from various investments. After reading the tweets and the ensuing article by Nairametrics, I detected a few mistakes which Mr Udoh made. Here, I would be discussing the mistakes in the hope that other investors would learn from them.
Not monitoring the monthly performance of his investment
Not too long ago, I penned an article on the need for calculating investment performance. The mistake most investors make is that they send their money to the fund managers to invest on their behalf and then they go to sleep only to check-in 10 years later to realise how dismal the investment performance has been. Investment performance should be calculated and monitored at least monthly. It is by so doing that you will be able to know if the objectives for which you set out to invest are being achieved and if not, you decide on a course of action.
Granted, not everyone knows how to calculate investment performance, but as an investor, you have the right to receive monthly investor statements from your fund managers. One of the information that an investor statement should contain is the current month and historical monthly performance of the investment. On getting the investor statement, you should look at three important statistics:
Month to Date return (MTD)
A month to date return is a statistic that tells the investor the Naira and percentage gain or loss that his/her investment made in the current month.
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Year to Date return (YTD)
The year to date return tells you how much gain or loss in Naira and percentage terms your investment has made since the beginning of the current year.
Inception to Date return (ITD)
Yet other statistics to look for, though not generally provided by fund managers in Nigeria, is the ITD. An inception to date return tells you the gain or loss made on your investment, both in Naira and percentage terms, since you began to invest. In the case of Udoh, the inception to date return would tell him that over a 10-year period, he lost about N263,379 or approximately 22% of his investment.
If Udoh had been paying attention to the investor statements he received from the fund managers, he would have noticed that he was losing money and would not have waited 10 years to cry out.
Lack of diversification
Another mistake I noticed is that he put all his eggs in one basket by investing N10,000 monthly in just one mutual fund, ARM Discovery. I have written on the need for diversification. If Udoh had invested in at least 3 mutual funds of differing strategies, like one equity fund such as ARM Discovery, one fixed income fund, and one high yield money market fund, he probably would not have sustained such a grave loss because the loss from one fund would have been absorbed by the gain in the other two or even one of them. That is the beauty of diversification.
Not looking at a fund’s objective
Not every fund is good for your risk chemistry or make up. While equity funds may be good for some, fixed-income funds may be better for others. It is possible that Udoh bought into ARM discovery fund because the fund was recording high returns then. He probably forgot that past performance is not a guarantee of future performance and that in itself, is a reason to monitor current performance. He probably did not realise that equity-based funds like ARM Discovery are prone to more volatility as such funds are highly correlated with the stock market. That again is the essence of diversification — by investing in multiple funds with varying correlations with the market, you spread your risk and reduce volatility within your portfolio.
Ask questions and be in the know
Like I said before, it is your right as a mutual fund investor to receive a monthly investor statement. If you do not, ask the fund manager for it. The fund managers are working for you; you pay the management fees and performance fees, where applicable. They owe you a fiducial duty to manage your money prudently and profitably.
Do not trash that investor statement
Some investors are in the habit of not taking investor statements seriously. This is about is your money. Go through it, find out about the performance as I noted above; where the fund manager is gracious enough to include a list of the fund’s 10 highest holdings, (an information that most fund managers in Nigeria do not provide), go through the list and find out what your fund is investing in. Where such list is missing, you have the right to ask and find out what your fund is investing in.
Don’t be scared to make a switch
When you discover that your fund is not meeting your set objectives, do not be shy to pull out of such funds into another one that may be more aligned with your objectives and risk characteristics. Before you invest in a mutual fund, however, find out if there is any lock-up period and any penalty that goes with it. Some funds will require that you do not withdraw your money until after 90 days, otherwise, you pay like 2% penalty. So, weigh your options or wait out the lock up period and switch. Again, it is your money and you have to ensure that it works for you. Do not wait for 10 years to find out how your fund is doing.