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How to build a profitable Mutual Fund Portfolio

How to build a profitable Mutual Fund Portfolio

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How to build a profitable Mutual Fund Portfolio

For those who do not have the time or expertise required to do the analysis involved in selecting good stock investments, mutual funds can be a good consideration.

Investing in mutual funds enables the investors, especially the not too savvy ones, to delegate the responsibility of researching and selecting what assets to invest in, to the mutual fund managers. In addition to that, it helps the investor achieve a level of diversification that may be suitable for his/her risk appetite or tolerance.

Even with mutual funds, it is not that easy to decide on which funds to invest in. This is because different funds have different objectives, different investment strategies and different performance track records while differing in suitability for different investors.

However, irrespective of an investor’s risk characteristic, some funds may be must-haves in a portfolio of investments. For those struggling to select which funds to invest in, here are tips on how to build your mutual fund portfolio.

There are direct sectors in the equity market, like the conglomerates, the consumer goods, the industrials, the energy, and the banking stocks. Unless one is very rich with a large capital base, one may not be able to invest in all sectors at the same time.

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[Read Also: Understanding Mutual Fund Fees: Management Fee]

There comes the beauty of mutual funds, in that it is easier to get mutual funds that invest in each sector so much so that by investing in such mutual funds you end up investing, albeit indirectly, to the sectors.

For example, investing in Vetiva Banking ETF, you get exposure to such banking stocks like Access, Ecobank International, Fidelity Bank, Guaranty Trust, Sterling, UBA, Wema and Zenith. It is much easier and cheaper to invest in Vetiva Banking ETF than it is to invest in all the constituent equities at the same time.

Steps in Building a Sound Mutual Fund Portfolio

In building your mutual fund portfolio, first decide which sectors of the economy you want to get exposed to. That decision will help in choosing which funds to invest in.

Understand Your Risk Tolerance

Different investors have different preferences, or appetites or tolerance levels for risk and different funds have different risk profiles. So, before building your mutual fund portfolio, you should understand your risk tolerance level.

In investment, risk is measured by market volatility or the ups and downs of the market. If you have a long position, your investment goes up when the market trends up and it goes down when the market trends down. So, you should understand how much of those ups and downs you are ready to tolerate or accommodate. For example, if you get worked up or hypertensive when your N100,000 investment loses 10% of its value because the market went down, then your risk tolerance is low and equity mutual funds may not be for you.

Your risk tolerance is a product of many factors like your age, because the younger you are, the easier it is for you to make up on lost money, but if you are closer to retirement, it may not be that easy and as such, your risk tolerance tends to be lower as you age.

Another factor that can affect your risk tolerance is the availability of emergency fund. If you have set aside an emergency fund, the tendency for a forced liquidation of your investment in case of emergency decreases and your ability to hang on in the face of market down turns increases. These are just a few of the factors that can affect your risk tolerance.

[Read Also: 5 post retirement ideas you should share with your parents]

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Determine Your Time Horizon

Before building your mutual fund portfolio, you should know what period you need to invest for. Some mutual funds have redemption penalties if you withdraw before a stated period of time, so to avoid such penalties, you need to remain in the fund for a period long enough to escape the penalties.

Mutual funds make money through income distribution and capital gains. The longer you hold a fund, the more you are likely to receive those distributions and depending on market conditions, the more likely it is to benefit from price increases by way of capital gains.

Decide on Your Asset Allocation

Now it is time to choose the funds you want to invest in, bearing in mind the tips noted already. The virtue of diversification has taught us that it is not good to carry all your eggs in one basket. In no area has this been truer than in investment strategy.

After knowing your risk tolerance, time horizon and investment objective, it is now time to allocate your available capital to the assets that will help you achieve the investment objectives without compromising your risk tolerance and within the realms of your investment time horizon. So, you may wish to consider the following:

Equity Funds

These are funds that invest mostly in equities but look for a fund that invests in blue chips, funds with good track records of performance. If your risk tolerance is relatively high, you could go for aggressive equity funds like Arm Aggressive, Stanbic IBTC Nigeria equity fund but if your risk tolerance is high and you have a bias towards a particular sector, like the banking sector, then you can look towards the Vetiva banking ETF or the likes.

[Read Also: INSIGHT: Why you really should consider investing in mutual fund today]

Balanced Funds

These are funds that invest in equities as well as fixed income and money markets. These are suitable for investors with low to moderate risk tolerance. Again, it is good to pay attention to funds with good track records.

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Fixed Income Funds

These are funds that invest predominantly in bonds, be they sovereign, corporate or local government bonds. These are good for you, if your risk tolerance is relatively low or you are retired or about to.

Money Market Funds

These are funds that invest predominantly in money market instruments like treasury bills, or commercial papers. Like fixed income funds, they are good for you, if your risk tolerance is relatively low or you are retired or about to.

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But it does not hurt to have a blend of equity funds with balanced funds so that in very good markets, the equity fund pushes your portfolio above par while the fixed income or balanced funds help to hedge against downside risk

Fund Manager Selection

This is about the hardest of all the steps because it takes more effort and research than the others. In selecting a fund manager, you should consider the manager’s investment style purity and consistency. Also, find out the expenses charged by the manager by calculating the expense ratio of the fund.

A manager’s tenure, asset selection skills, and shareholder friendliness are also areas that you need to dig into. In more advanced and organized markets, fund manager selection is often done by specialized companies or experts who specialize in conducting fund manager due diligence for a fee.

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. osazee Obazee

    July 6, 2019 at 4:37 pm

    hi,
    Nice piece. I would like your opinion on Investment-one vantage dollar mutual fund.

  2. Anonymous

    December 27, 2019 at 12:05 pm

    Thanks for U’r writeup. pls can a stock

    b. broker buy ETF for some one.

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MSME

FG to provide financial support for 1.7 million businesses, individuals in next 3 months

FG had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.

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FG releases new details on MSMEs support scheme, budgets N200 billion for loans

The Federal Government has announced plans to provide financial support for 1.7 million businesses and individuals across the country within the next 3 months.

This disclosure was made by the Minister of State for industry, Trade and Investment, Ambassador Mariam Katagum, at the virtual commissioning of the Fashion Cluster Shared Facility for Micro, Small, and Medium Enterprises (MSMEs) tagged, Eko Fashion Hub, in Lagos.

Katagum disclosed that the initiative is borne out of the Federal Government’s continued commitment to helping cushion the devastating impact of the coronavirus pandemic on the economy by saving existing jobs and creating new job opportunities.

READ: FG releases new details on MSMEs support scheme, budgets N200 billion for loans

The minister said that President Muhammadu Buhari’s administration, through the Economic Sustainability Committee, had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.

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She said, “The Federal Government is fully committed to empowering Nigerians; more so in the face of the COVID-19 Pandemic. In this regard, the government, through the Economic Sustainability Committee had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.

“These programmes include among others, the N75 billion MSME Survival Fund and Guaranteed Off-take Schemes of which I have the honour to chair the Steering Committee for the effective implementation of the projects.

READ: NNPC reveals survival strategies to cope with the oil sector downturn and new normal

“The project, which will run for an initial period of three months, is targeting 1.7million entities and individuals and has provisions for 45 per cent female-owned businesses and five per cent for those with special needs. The registration portal for the schemes is set to open on Monday 21st September 2020 and I urge you all to take full advantage of the schemes.’

The Nigerian Economic Sustainability Plan which was produced by a committee headed by the Vice President, Yemi Osinbajo, is a response to the health and economic challenges which foisted on the country by the outbreak of the novel coronavirus pandemic.

READ: FG to save N1 trillion annually from petrol subsidy removal

Aside from developing robust monetary policies and fiscal measures to enhance oil and non-oil government revenues and reduce non-essential spending, the plan also includes a N2.3 trillion stimulus package for the economy.

Katagum said that the schemes were at the core of the N2.3 trillion stimulus package being implemented by the Federal Government. She said that the commissioning of shared facilities was also expected to provide succour and relief to the teeming micro-businesses in need of space and infrastructural support

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Personal Finance

8 Ways to set yourself up for financial freedom in your 20s

These simple tips might just be what you need to set yourself up for financial freedom.

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Your 20s is one of the most important stages of your life, especially in determining your financial trajectory. One certain thing about financial freedom is that no one ever stumbles on it, you have to plan, and be intentional about it.

Mismanaging your 20s could see you spiral into a rat race that you may never recover from, especially after setting up a family.

Although it might be very difficult to become financially free in your 20s, it is your responsibility to ensure that you are on the right track. How do you do that? Simply go through our list of 8 ways to set yourself up for financial freedom in your 20s, below.

READ: 7 Reasons You Need to Start Getting Thrifty

Also, remember that it is a process. Unless you hit a jackpot and invent a product that goes viral worldwide in your 20s, you have to follow the process. And even if you hit a jackpot, financial prudence is still necessary for growth and sustenance. Look around you, numerous examples of individuals exist, who were once millionaires or billionaires, but now declared bankrupt. This should tell you something.

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8 Ways to Set Yourself Up for Financial Freedom in your 20s

1. Draw a blueprint for the future: Financial freedom is a goal. Just like other achievements that you planned to accomplish at a set time, you have to perceive it as something that you need to attain. The first step to drawing a blueprint is having an idea of what it would look like. Likewise, the same concept applies here; set your mind to your plan, and draw it out. Set milestones that you plan to hit, and set dates when you plan to achieve them. The path to financial freedom entails these key factors; identify them, and you’re well on your way to becoming a financially independent 20-year-old. Remember, nothing perfect was created without an initial plan in place. Faraday didn’t just wake up one morning and create electricity with a snap of his finger, it took countless hours of planning to invent the greatest element used by man.

READ: A Billionaire recommends 3 Strategies to Create Wealth

2. Understand investment and leverage your knowledge of it: Sure, this could have simply said; “Invest more often” or “Start investing” but people tend to read these articles and act based on the words of the article solely, rather than what the words also imply. Investment is good, and even better, do it more often but it is important to note that it is not something to jump into out of the blue. It takes reading and studying to understand how to play your cards right when investing.

After studying the art of investing, then you can proceed to the next phase; leveraging your newly gained knowledge. Invest wisely in places where you are sure to get a high return. Do these in different places, and in a matter of time you can puff your chest and do “yanga” to those friends that said; “You’re young, spend your money and chop life”. We’ve all had those kinds of friends. Be wise, make smart investments, and work your way to gaining financial freedom in your twenties.

READ: Spending strategies to help you live within your budget

3. Find a financial planner: The importance of this step cannot be undermined. While some try to gain financial freedom on their own, many get financial planners to help them attain this feat. A financial planner would help you create detailed and useful financial forecasts that will let you know what you have done financially, and how it affects your financial forecast. In some cases, they could also advise you on the best financial oriented actions to take to get the best results in your financial forecast. Your goal is to be financially independent in your twenties, great! Set a forecast that dates to your set time, and you can have a rough idea on what your financial status would look like in that year.

If you’re curious to know what the heavily reiterated “Financial forecast” would address, they portray, financial risk management, investment planning, cash flow management, insurance planning, tax planning, business succession planning and more.

READ: Major reasons why XRP is better than Bitcoin

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4. Filter needs from wants: If you’re planning to gain financial freedom in your twenties, you need to learn how to identify what you “need” and what you “want” out of mere interest. This is not only a key step towards financial freedom but also to adulthood. Needs in this context, don’t necessarily mean the “essential human needs” like food or shelter. A need is what is exclusively crucial to you at the moment, which is worth spending money on. From that definition, you can most likely conclude on what “wants” would be. When trying to make a purchase, always ask yourself if you are in dire need of it or consider the benefits of getting it; do they outweigh the cons of not having it?

No matter how convincing that salesman is, don’t let him talk you into buying what you do not need. Spending on the necessary things gets you financial freedom, and it’s a long-term ideology in adulthood.

READ: 3 BTC whales move 140 million worth of Bitcoins from Binance

5. Don’t rush, patience is key: “Click here to earn millions like this sharp guy from Lagos.” or “Invest 20k to get 100k in a week.” Here is a tip; work towards achieving your goal of financial freedom, but know that it will not be easy – nothing worthwhile is easy. Be patient, don’t jump into schemes and scams, thinking they are smart investments. Point number 2: Understand investment, and leverage your knowledge of it. There is no “get rich” quick path or “double your investment in 24 hours”. Most of these schemes bank on paying you with other people’s money, and eventually many lose and only a few benefits. Keep in mind that wealth grows and accumulates over a long period, therefore be patient and disciplined enough to see it through.

6. Don’t secure loans you are not sure to repay: Look to secure loans when it is necessary, and when doing so, ensure that you can pay it back. For example, the debt you acquire to finance a higher education should not exceed your expected income. Do not borrow a sum that you cannot repay, and always consider the interest rate of the debt. The last thing you want to do is be the person who wants to gain financial freedom but has a lot of debts to clear. For you to move forward, you have to be free of debt. Mark Cuban once said; “The best investment is paying off your debt”.

READ: Finding Balance: GTB’s impeccable gains versus its notable losses

7. Be a businessman, negotiate: Don’t be the person that always agrees to the price called by the seller, neither should you be the kind of person that says “I don’t like negotiating, it makes me seem cheap” – that’s absurd. If you’re going to be financially independent, you have to understand that negotiation is one of the most crucial aspects of a business. It allows you to get what you want at a rate that is in your favour, as opposed to its initial price. By negotiating, you could save thousands annually. Imagine if you always had to pay the exact amount in all the purchases you have made? That is a lot of money that you could have saved up to invest with.

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8. Always make a budget and stick to it: It is not enough to have a budget, it is just as important to follow it. This allows you to record your planned expenses, and it gives you a certain poise and discipline when spending, as you would be conscious of the fact that a certain amount is meant to be spent on something important, that you have planned. Having a monthly budget that you can commit to is a great way to set yourself up for financial freedom, one that we highly recommend.

Your 20s are not going to be around for long. It’s a time where you can make key decisions with minimal consequences and still have time to recover. However, we urge you to learn from these eight tips and accompanied by hard work and perseverance, you can be sure of gaining financial freedom in your 20s.

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Personal Finance

How to get the right finance lawyer for your business

Hiring the wrong lawyer may result in grave consequences for your business.

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Businesses fail and close down everyday. Statistics show that globally, about 20% of small businesses fail within their first year. There are many reasons why these businesses fail. In Nigeria, however, some businesses fail due to bad financial decisions. And that’s why every entrepreneur needs a good finance lawyer to offer the right fiscal advice.

There are many successful companies in Nigeria that hire finance lawyers to help them deal with legal issues relating to their finances. Some businesses even have robot lawyers that analyze data and make accurate financial predictions for them.

Finance lawyers have special knowledge representing their clients in financial matters like securities, banking, and bankruptcy. They are also involved in company registration, tax compliances, raising capital, and drafting agreements for their clients.

For example, the Finance Act of 2020 has amended the tax laws in Nigeria, and businesses are required to comply with the provisions. A good finance lawyer will help your business to act in accordance with all the tax legislations.

Hiring the wrong lawyer may result in grave consequences for your business including fines, liquidation, and lawsuits.

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A large percentage of lawsuits in Nigerian courts are financial disputes involving many businesses.

Below are some tips on how you can get the best from your finance lawyer:

Be prepared to share important financial records

Lawyers work with facts and are therefore more effective when you provide them with all the information concerning your business.

Before you hire a finance lawyer, be prepared to share all necessary financial records. Don’t hide any records. Being open with your lawyers will enable them to give you the best financial advice for your business.

Your finance lawyer can protect your interest if you grant him/her access to all your financial information.

 

Do some research to find the most qualified Finance Lawyer

Most people assume that all lawyers have the same level of knowledge and expertise. But law practice is a vast field and every lawyer has a favorite area of specialization.

While most lawyers are into general practice, some focus only on one or a couple of areas.

Researching before hiring a lawyer means locating one with the right knowledge and skill set. Researching will help you to hire the best hand for your kind of business.

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A finance lawyer who understands your business can assist you to lay a proper foundation and help you avoid problems that may crop up in the future.

 

Ask for a referral

One of the best ways to find the right kind of finance lawyer for your business is to ask for a referral from reputable lawyers.

Lawyers know the strength and capabilities of their colleagues and are always willing to refer you to only the best in their field.

Another great way to ask for a referral is to consult a fellow business owner to recommend an experienced finance lawyer.

 

Investigate the Finance Lawyer you intend to hire

With time, every lawyer tends to develop a reputation. While some of them are good, others are not so good.

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Take into consideration feedback about the finance lawyer you intend to hire. Reviews and feedback will help you to decide if the lawyer will make a good employee or not.

You don’t want to get involved with a finance lawyer who is in court with most of his/her clients.

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One good way of investigating a lawyer is to make inquiries at places where the lawyer practices.

Court workers see lawyers work every day and have a good knowledge of their practice and personalities

 

Focus on the Finance Lawyer’s experience

Experience is a huge asset in law practice. Experienced lawyers not only make your job easier, but they make fewer mistakes.

An inexperienced finance lawyer is bound to leave you exposed to financial elements that will harm your business.

Business owners should therefore consult only finance lawyers with vast experience in their business area.

For example, if your business involves an international transaction, it would be a bad idea to consult a lawyer with no knowledge of international businesses.

 

Don’t forget: size matters

Many business owners are sometimes torn between hiring big law firms or small law firms for their financial issues.

The kind of law firm you should hire for your business depends on the type of service you want.

If your business involves complicated financial transactions then your best bet is to hire a large law firm.

Big law firms have wide networks and resources to push through and get your job done in good time.

Small law firms, on the other hand, can provide prompt and personalized services whenever you need them.

 

Get a lawyer you can afford      

As a business owner, your primary objective is to make money. Law firms are also run as businesses and set up to make money.

Although the cost of legal services does not come cheap, they are however negotiable.

Some business owners have made the mistake of engaging lawyers without determining the cost of those services.

Failure to find out the cost of the legal service of a lawyer or law firm will expose you to paying whatever is presented as lawyer’s fees at the end of the day.

Take note that our courts do not joke with lawyer’s fees as they believe a lawyer deserves his/her wages.

 

Have a written agreement

After discussing and agreeing with the lawyer on the fees and the mode of payment, insist on having the terms written down.

Go through the agreement and if you do not understand any clause or provision, seek a third party interpretation before endorsing it.

With a written agreement, you will have a pretty good idea of how much you are paying for the legal services.

 

Wrap up on hiring the best Finance Lawyer for your business

In business, anything can happen. Business owners should therefore take every step possible to minimize their financial risks.

One of the best ways to protect yourself and your business interests is to hire a good financial lawyer. However, the onus is on you to hire top finance lawyers that have the right experience and skills to help your business thrive.

Don’t forget: it is better to hire a good lawyer now than spend money in the future trying to extricate yourself from trouble.

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