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.
[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.
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:
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.
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.
5C’s of creditworthiness: What lenders, Investors look for in a business plan
Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.
Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.
For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.
Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.
The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.
Lenders and investors refer to these criteria as the five C’s of credit.
1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.
2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.
3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.
4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.
5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.
The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.
Written by Chukwuma Aguwa
Don’t be fooled by COVID-related scams
Always consult the institution in charge of health-related matters to confirm any fishy information you come across.
The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.
This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.
With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.
The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.
Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.
Channels used for COVID-related scams
There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.
Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.
Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.
The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.
Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.
Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.
The place of electronics in COVID-related scams
These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.
Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.
In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.
The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.
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