The total Net Asset Value (NAV) of mutual funds in Nigeria has continued to decline. In fact, the Nigerian mutual fund industry has recorded 16 weeks of downward trend in Net Asset Value.
It is not very apparent why that trend is becoming the new norm in the industry, but it may not be unconnected with the security challenges facing the Nigerian nation and the continuous decline in the value of the local currency in relation to other major currencies.
It could not have been the aftermath of Covid-19, as the country did not witness as much disruption when compared to countries like India, the USA, Britain or Brazil.
Be that as it may, it is obvious that investors from different or even the same environments react differently to similar events. While investors in Nigeria have been quick to withdraw their money from mutual funds in response to the happenings in the country, analysis from the Investment Company Institute (ICI) shows that “investors in long term mutual funds, (in the United States), have never been quick to redeem their holdings in periods of market stress.”
That assertion comes from an analysis of data from the past 80 years. This means that over an 80-year period, US mutual fund owners have steadfastly held on to their mutual fund holdings, come rain or come shine. According to the analysis, that steadfastness held sway also during the Covid-19 pandemic era, as US mutual funds suffered a 2.1% reduction in Net Asset Value due to redemptions, but in Nigeria, it was 27%, per Quantitative Financial Analytics.
Why is it so?
The analysis noted that mutual funds investors in the US behave the way they do with respect to redeeming their mutual fund holdings because they know that staying the course will help them reach their financial goals better.
Another reason the analysis gave is that financial experts, like the fund managers in Nigeria, advise or counsel their client investors about the benefits of staying the course. Through such advice, investors realize that “panic selling during a market downturn frequently results in losses rather than gains.” Investors also stand to lose from any significant gain from a rebound in the market if they are slow to return to the market after redeeming. The analysis reemphasized the fact that “successful investing depends on continuous time in the market, and not timing the market.”
Also, American investors hold on to their mutual fund investments because of the tax implications of making redemptions. This is because such redemptions could trigger capital gain taxes which are usually larger when they are short term capital gains. Again, the fact that fund managers charge redemption fees, especially for redemptions occurring within a short period after investment, makes investors stick out the hard times without redeeming their mutual fund holdings.
What this means for you
One could argue that the Nigerian and U.S market and environments differ and that most Nigerian mutual fund investors are in it for the short to medium-term gains, unlike the US, where the majority of mutual fund investors are retirement savings account holders.
Agreed that the US and Nigerian environments and markets differ, one or two things can be learned from the analysis. If for nothing, Nigerian mutual fund investors should learn that “successful investing depends on continuous time in the market, and not timing the market.”
Also, Nigerian mutual fund investors should know that panic selling depresses the market further and as fund managers need or are required to sell the position holdings to meet up with redemption requests, a depressed market from panic selling could result in the positions being sold at lower prices.
Nigerian analysts also ought to know that, while American investors received monetary support from the government (palliatives) to keep afloat during the pandemic lockdown, Nigerian mutual fund investors had to dip into their investments to keep afloat.
How will this business will be done
It is over analysis. if one year treasury bill yield in USA goes to 8%, their mutual fund will drop by 70%.