Mutual Funds (MF) and Exchange Traded Funds (ETFs) are amongst the fastest growing asset classes in Nigeria. Broadly they are both classified as Collectives Schemes and are similar in many aspects yet are also different in operations.
Mutual Funds (MF) have been in existence for a long time. Mutual Funds are pools of funds created with the intent to pooling funds from various investors and buying assets. MF allows those investors to own the wide range of assets that the MF own, thus achieving diversification with a lower cost.
Dutch merchant, Adriaan van Ketwich is credited with the first investment trust in 1774 under the name “unity creates strength”. The first mutual fund to include bonds and shares was the Wellington Fund which was set up in 1929.
Nigeria’s oldest mutual fund, the Chapel Hill Denham Paramount Equity Fund has been in operation since 1991. The Security and Exchange Commission published the Nigerian Net Asset Valuation (NAV) Summary Report which found that there are 106 mutual funds in Nigeria with a total asset value of $3,714,013,444.
Exchange Traded Funds (ETFs) are a more recent asset class in Nigeria. (ETFs) are securities that track the performance of an index or basket of assets. There are about 12 listed ETFs on the Nigerian Stock Exchange
What are Mutual Funds and ETFs?
Think of mutual funds as a savings pot where you and your friends save excess cash and subsequently invest that entire savings in a specific way, maybe to buy a cow for Christmas. Imagine if your group of friends decided to allow everyone in your town to join your investing club and contribute to buying cows. The funds then become so larger that you employ an asset manager to oversee the administration of the cows, and you simply create a company that will also offer cows, goats, and lambs. Thus, contributors can join your club and receive goat, lamb, and cow meat without having to buy actual cows or goats.
This is exactly how mutual funds work. A company like Stanbic IBTC creates an investment fund just like those friends, but instead of cows, they invest in bonds, money markets, equity, and other financial instruments. By buying shares in just that StanbicIBTC fund, you own a part of whatever the fund owns. This is s cheaper way for you to participate in the broad market, without having to buy every single investment.
Are Mutual Funds similar to ETFs?
In similarities, both offer investors a low-cost way to diversify holdings by selecting specific sectors, geographical regions, or risk profiles. For example, both MF and ETFs allow investors to buy country-specific investments e.g., the Vertiva Griffin 30 EFT and the Global X MSCI Nigeria ETF that invests in only Nigerian equity.
How do they differ?
In terms of differences, MF cannot be traded during the trading, an investor must wait for the close of business to calculate the Net Asset Value of the mutual fund and then place an order to buy or sell. ETFs on the other hand allow trading during the day.
Why buy collective schemes, why not invest directly?
The collective investment schemes have been embraced by Nigerians because of their greater promise of yield and diversification. These funds have offered retail investors the ability to earn a higher return on mostly money market investment, much higher than placing funds in banks. This preference for collective schemes has also been highlighted by the fall in yields offered by the risk-free Federal Government binds.
About 69% percent of the total assets of mutual funds are invested in money market funds. 9% in Eurobond funds, 7% in bond funds. In simple terms, by investing with others in a fund, the individual investor can access investment management which increases his chances to gain superior returns.
The future for ETFs and Mutual Funds
These asset classes will continue to grow in AuM as investors become more sophisticated and price-conscious. ETFs, especially Index ETFs offer sales commissions at a fraction of the brokerage cost. Also, FinTech’s automation of the asset allocation process has allowed more fund options to match individual choices.