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Financial Literacy

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.

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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.

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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.

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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]

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.

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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.

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.

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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Billionaire Watch

Want to be like Warren Buffet, Michael Phelps? Here are their secrets

The distinctiveness among Buffet, Dangote, Ovia, Phelps, Bolt, Musk, is not what they do, but how they do it and how often they do it.

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Warren Buffett

Michael Phelps won 22 Olympic medals (18 gold), how did he do it? Well, he trained and trained and trained, then he ate and ate and ate every day. He was also blessed with natural attributes i.e., he was tall.

So, wait, if I am tall and eat, and train, I can also win 18 gold medals? No! but stay with me.

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Warren Buffet likes to invest. He reads research reports, likes numbers and is always looking a discount deal on great stocks. Ok. So, if I am good with numbers, research buy great stocks I will become as rich as Warren Buffet? Well, maybe not as rich but you will earn more from your investments. The distinctiveness among Phelps, Bolt, Buffet, Musk, Dangote, and Ovia, is not what they do, but how they do it and how often they do it.

READ ALSO: Investing in Cryptocurrencies during this economic shutdown; here’s your need to know

Let’s look at an Olympic swimmer like Michael Phelps. When Michael was eight, he wrote out his goals; he wrote, “I would like to make the Olympics,” then listed his time goals for the various races i.e. breaststroke, freestyle etc. At the age of eight, this future Olympian had visualized his goals, written them down, and put a date for accomplishing them.

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When seeking to create a financial plan, it is impossible to achieve success without visualizing out a goal on paper. Imagine creating an investment plan without any idea of a retirement date or income or rates of return. It’s impossible without a clear road map to determine how much to save and invest for five years. During his teenage years, he trained “every single day, 365 days a year, Sundays, Christmas and Thanksgiving days included… and twice on his birthdays,” says his coach, Bob Bowman.

If an investor saved N1.00 every day for 5 years at 0%, that saver would have N1,826.00 What if those savings increased to N5.00 and were invested at just 5% annually? Then the savings pot will become N10,373.04. Yes, inflation will erode the value after 5 years, but applying a 13% inflation rate, the saver still has a real saving of N5,170.14.

READ MORE: Top 10 risks Nigerian businesses will face in 2020/2021 – Report 

So, the second lesson we take from Olympic champions is to start early, save, and then invest constantly. Micheal Phelps is a swimmer, a sport for endurance and speed. What do endurance athletes like swimmers and marathon runners eat? Food rich in carbohydrates; they need the carbs to fuel the massive amount of energy they expend during their sports. Phelps, for instance, for breakfast eats as many as 12,000 calories prior to his races. His breakfast consists of “three fried-egg sandwiches, three chocolate chip pancakes, a five-egg omelette, three sugar-coated slices of French toast, and a bowl of grits.”

What does a sprinter like Bolt eat? Not calories but lean protein, eggs, meat, fish, dairy. Protein allows muscles to recover and develop after sprinting, which causes minute damages to muscle fibres that can be easily converted to energy. So, two different Olympic champions, each multiple gold medal winners, but because of their different sports, they eat very differently to achieve a different objective.

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Similarly, in investing, each investor is different, bond investors have instruments that have 30-year durations as opposed to stock traders who may be looking to buy and flip a stock in hours. What is key is to invest according to a stated objective and risk profile.

Patricia

Where the investor has a longer endurance factor to risk, meaning the investor can accommodate volatility in his earning, that investor will be comfortable investing on equities. Equities are higher-risk investments and can lose all invested capital but can also gain 100%.

However, where the investor has a lower risk endurance, then the investor will fill his plate with lean risk asset classes like sovereign bonds which offer lower volatility to stock and deliver a fixed return, but suffer if interest rates rise.

Thus, our third lesson from the Olympians, the food each investor eats, is a function of his individual sport. Where the investors have lower risk, his asset allocation diet is different. Each investor must tailor his asset allocation to his objectives and investment goals.

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Investment Tips

Proxy Voting: Making Your Voice Heard Inspite of COVID-19

Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf.

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Proxy Voting: Making Your Voice Heard Inspite of COVID 19

One of the privileges of owning shares in a company is the ability to attend the shareholders’ meetings and vote on important issues about the company. In most cases, such issues touch on dividend declaration, election and/or reelection of directors, authorization to fix independent auditors’ remunerations, and the election of members of the audit committee, among others.

It has been observed that shareholders love to attend such annual general meetings in person for the pride of place it provides, as well as the social status it bequeaths to the attendees in addition to the souvenirs they receive during such meetings.

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Unfortunately, that era of a social event involving the physical gathering of shareholders seems to be going extinct, thanks to COVID-19.  However, in spite of the devastating effects of COVID-19, and the changes it is bringing to our social life, shareholders can still make their voices heard during non-physical shareholders’ or annual general meetings. This they can do using proxy votes.

What is Proxy Voting: Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf. Proxy voting has not been more important than in the present COVID-19 times. In reaction to the pandemic, proxy voting is being used in areas outside corporate governance. For example, the US House of Representatives is pushing for proxy voting as a means of getting things done in the house. In a proposal released by the House Speaker, Nancy Pelosi, US lawmakers would be allowed to cast votes for their colleagues who are not in the Capitol in person. That underscores the advantage and the increasing importance of proxy voting.

Nigerian Companies and Proxy Votes:  Proxy voting is not new in Nigeria, especially among Nigerian companies. Whether it has been effectively used or taken advantage of is another question. However, Nigeria’s Corporate Affairs Commission (CAC) has been proactive and forthright in its quest to ensure that companies in Nigeria and Nigerian shareholders alike, take advantage of the proxy voting process in keeping with the social distancing rules put in place by various governments to curb the menacing COVID-19. The CAC has therefore asked companies to take advantage of “S.230 CAMA on the use of proxies in holding their Annual General Meetings.”

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(READ MORE: IMF, World Bank to hold virtual meetings over Coronavirus epidemic)

In line with the availability of the proxy voting process as a way to give every shareholder a voice and the encouragement and enablement from the CAC, many companies in Nigeria are complying with the advice. A visit to the website of the Nigeria Stock Exchange indicates that all the 30 companies that notified the public about their annual general meetings via the Nigeria Stock Exchange, since April 1, 2020, included notices or indications of the need for proxy votes in such notifications. Many of them even included links to live-stream the events, for those who would like to participate online.

Proxy Voting: Making Your Voice Heard Inspite of COVID 19

Brace for Change: There is no doubt that COVID-19 has changed and will continue to change the way certain things are done. From the look of things, proxy voting may become the new normal in corporate governance and conduct of shareholders Annual General Meetings.

Shareholders, big and small, should start getting used to voting by proxy, especially those who have not been doing so in the past. It is only by so doing that you will make your voice heard, in the affairs of the company in which you have worked so hard to invest in.

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Patricia
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Coronavirus

COVID-19 reveals that many Nigerians have no emergency savings

The playout of events following the lockdowns resulting from the ongoing COVID 19 pandemic shows that Nigerians do not have emergency savings

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Though we are still grappling with the effects  of COVID-19, it may not be too early to begin to take stock and find out what we did well during the pandemic and what we should have done better.

Almost everyone’s radar has been on the ill-preparedness or lack of appropriate response by the government, with little or no time for an inward look at ourselves.

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The type of government we have in Nigeria should not have left anyone surprised at their response to the pandemic, especially when it came to the welfare of the populace. What do you expect from a government that is dysfunctional, at best?

With such government, it is time for Nigerians to begin to watch out for themselves and prepare for the unforeseen, like the times we are in currently. The playout of events following the lockdowns caused by the ongoing COVID-19 pandemic shows that Nigerians do not have emergency savings.

According to a recent publication from one of the national dailies, “Barely one month of a lockdown of Abuja, Lagos and Ogun state, millions of Nigerians had become stricken with hunger. Many could not bear an extension of the movement restrictions.” The ensuing protests were indicative of the fact that many Nigerians were living off their daily incomes with no savings to fall back on.

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High Poverty Level

Many may have asked how they could save without having funds, to begin with. Agreed, the level of poverty is high in Nigeria; however, people should know that having savings is not a luxury, but a necessity. It does not have to be large, but putting aside something, no matter how small on a regular basis goes a long way in times of emergency.

I have seen images of Nigerians who surprised themselves and others with how much they saved over time in their piggy banks. There is no hard and fast rule of how much one should have in emergency funds, but there seems to be an agreement among financial analysts and planners that having the equivalent of 6 months’ expenses in your emergency savings account is the ideal.

The author of the book “Richest Man in Babylon” stated it clearly that if you do not save, it means that you have paid everyone else but yourself.

How to Start Saving

Pay yourself first: In line with the instructions in “The Richest Man in Babylon,” when you receive your monthly salary or collect that sales proceed from your business, “pay yourself first” by saving at least 10% of your collections or salary. For the salary earner, set up a direct deposit account where the money would be taken out of your pay directly into a bank savings account. By so doing, you are forced to save.

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(READ MORE: If you experience these signs then know your salary is not enough)

Patricia

Cultivate the savings habit: Just as spontaneous buying is a habit, form the habit of saving. Do not see saving as putting aside the remnants (if any) after all your expenses. If that is your attitude to savings, then you fall into the group that pays everyone else but themselves.

One thing is certain; as long as you have the money, there will always be something that is going to demand that money from you.

 

Remind yourself to save: If you are a salary earner who does not want to set up a direct deposit from your paycheck or you are a businessman or woman of any means, you can set up a savings reminder around the time you receive your salary or around your peak business time.

One website that can help you with this is here. With this, you can send an email to yourself to be delivered around the time you expect to receive your pay or business income, reminding yourself to save. Just like you set an alarm on your mobile phone, you can do so with a reminder to save.

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Start Small ASAP: The Bible says that if you are not faithful with small things, how can you be faithful with larger things. You do not need millions to start saving, all you need is the will, the determination, and consistency. So, start small and start now, but be consistent.

Reduce your Expenses: As already noted, one of the reasons that people do not save is because their expenses keep increasing, even when income sources are shrinking. If you find yourself in that situation (and you surely will, at one point or the other), cut down on your expenses and make them fall in line with trends in your income. Avoid spontaneous, emotional and flamboyant buying. Buy out of need, not out of want.

(READ MORE: Between saving, investing, speculating, trading & gambling)

Why It Seems Difficult to Save: To a whole lot of people, it is difficult to save because they live in the now. This is what financial psychologists call scarcity of attention. This scarcity of attention stops people from seeing what is really important and makes them see the urgent current expenses they need to cover.

5 Money Mistakes You Might be Making, COVID 19 Shows that Many Nigerians have No Emergency Savings

One reason why it is difficult to save is that while the expenses keep rising (out of increased need and inflation), sources of income keep shrinking or stagnating. The good thing however, is that we have the option to shrink our expenses in line with shrinkages in our income, but often times, we do not choose to do that. That is where the inability to save starts from.

Conclusion: If there is any lesson, we learned from the sudden outbreak of COVID-19, it is and should be that emergencies happen, and efforts should be made to cushion the financial impact of such emergencies by preparing for them in advance through emergency savings.


 

Written by  Uchenna Ndimele uchenna@mutualfundsnigeria.com

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