What are mutual funds?
According to Investopedia, A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets.
Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.
A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
In simple terms, professional investors like Stanbic IBTC, ARM, United Capital, etc., pool investments and carefully invest in assets ranging from commodities like gold to stocks like Tesla and even ETFs like Nikkei 225 and DAX 30.
The reason why investors trust these professionals is because of their methodological and pragmatic approach to investing.
Most of them have research arms that do diligent studies before any investment decision is made thereby increasing the odds of profitability.
However, as with any investment, mutual funds are not a hundred per cent guaranteed to post returns. According to the Indian Times, there were only two funds on their watch list that lost more than 10% in 2023.
These are Mirae Asset Hang Seng TECH ETF (-11.76%) and Nippon India ETF Hang Seng BeES(-10.65%).
How to invest in mutual funds
The world is moving faster and faster towards convenience and these days everyone avoids the complicated and instead opt for the simple.
The days of filing applications and wading through multiple paperwork before adding mutual funds to your investment portfolio are far behind us.
Now, you can invest in these funds from the comfort of your home. There are several apps that allow you to invest directly in these funds just with your smartphone. Cowrywise, Piggvest and Bamboo are among the most popular options out there.
Typical mutual fund returns
In investing, the returns are usually proportional to the risk. For example, cryptocurrencies promise one of the highest upside potentials but also have the easiest path to financial ruin.
Mutual funds on the other hand do not promise over-the-roof returns but do not have a very steep downside potential. In fact, most mutual fund operators have a maximum drawdown clearly defined in the investment prospectus.
Let’s take a look at some of the highest-performing mutual funds in Nigeria. Stanbic IBTC absolute return fund ytd 6.86% Stanbic IBTC aggressive fund (YTD 49.9%), Stanbic IBTC balanced fund (YTD 26.75%), Stanbic IBTC bond fund (YTD 3.65%), Stanbic IBTC conservative fund (YTD 19.84%), Stanbic IBTC dollar fund (YTD 5.39%), Stanbic IBTC enhanced short-term fixed income fund (YTD 7.03%), Stanbic IBTC etf 30 (YTD 35.32%), Siaml pension etf 40 (YTD 52.24%), Stanbic IBTC ethical fund (YTD 34.03%), Stanbic IBTC guaranteed, Stanbic IBTC absolute return fund (YTD 6.86%), Stanbic IBTC aggressive fund (YTD 49.9%) Stanbic IBTC Imaan fund (YTD 41.18%), ARM aggressive growth fund (YTD 11.4%), ARM ethical fund (YTD 7.2%), ARM Eurobond fund (YTD 1.72%), ARM money market fund (YTD 13.01%).
As we can see, typical returns for most funds usually return between 4-15% but some funds return as high as 50%. However, aggressive funds have higher risk exposure.
What is my definition of “get rich quick”
Many mistakes getting rich quickly for getting rich easily. While it is very possible to get rich in a short time from investing, it is almost impossible to get rich easily.
For my definition of getting rich quick, I first describe what it means to get rich slowly.
Getting rich slowly is treading the normal route of getting a job, working for 35 years and retiring with a gratuity and just enough to get by.
Getting rich quickly is shortening the process. Through a high-paying career, starting and selling a business, creating solutions solving problems etc.
According to Statista, about 50% of the 3194 billionaires worldwide are aged between 50 and 70.
Obviously, it is possible to get rich with a lot of life left to spare.
Getting rich is a process and many see the event of getting rich and neglect the process.
Get rich quick vs scam opportunities
How about I double your money for you in one month but you must bring in three people every month to secure this payout. Sounds familiar? Scam opportunities are very easy to spot and are definitely so different from getting rich quickly. They fall into getting rich easily.
The easiest way to spot scam opportunities is the exorbitant returns and seemingly hands-off approach to making money.
You just need to put in your hard-earned money in this ridiculous business venture with little or no explanation on how it works and you sit back while we do all the work for you. And also, this investment is 100% sure. Sounds familiar?
Secondly, the owners of these fraudulent schemes know that for the operation to keep going on, new ignorant people must come in the pipeline.
They offer unbelievable incentives for recruiting new customers for this purpose. If you look hard enough, it is not so difficult to tell a Ponzi scheme from a legitimate business operation.
Wealth accumulation vs wealth preservation
What exactly are you trying to do at this stage of your finances? Are you trying to preserve your wealth, or amass as much as possible? Knowing the distinction is very important and can save you from unnecessary stress.
For example, if you work a normal job and struggle from hand to mouth, your goal should be exponential wealth growth rather than wealth preservation because, in reality, you have almost nothing to preserve.
The irony is when people who can barely save or have enough to invest think they can make a killing by investing in treasury bills for example. They get disappointed when they realise that these vehicles simply preserve wealth and not necessarily accumulate it.
Why mutual funds cannot make you rich quick
Say you earn N2m net income per year and you manage to save 50%, you’ll have about N1m saved. To save N100m, you’ll need to do this for 100 years.
! The first myth that savings alone can make you rich is also a lie.
Say you decide to invest in a mutual fund. Every year you sink in N1m and the fund returns on average a 5% ROI yearly, it would take you about 94 years to make N100m!
For context, according to Statista, the life expectancy for males in Nigeria is around 53 for females and 52 for males. So this means you need around two lifetimes to secure wealth!
How to take advantage of mutual funds
The truth is the rich never got wealthy from investing in mutual funds.
They did so by starting a business, and growing exponential wealth and then and only then did they look into options like mutual funds and treasury bills. For the scenario we discussed in the previous section, imagine if you start compounding your wealth with mutual funds at N100m, in 10 years you would have made an extra N62m.
The compounding effect of investing in mutual funds and the like only makes sense when you have huge capital.
Good luck compounding N100k and getting wealthy off of it! Starting from scratch what you need is building your own financial nest egg!
Building your financial nest egg
Building your financial nest egg is possible through five broad means; an inheritance windfall, a very high-paying career, settlements in the form of gratuity or legal payoffs, unusual financial gains like winning the lottery, and finally exit from a business.
If you currently have a low-paying job, look to upgrade your CV and seek higher-paying alternatives. You could turn to other investments for little returns that would offset expenses and bill payments. The key thing to note here is you aren’t expecting to get rich from it.
If you currently own a business, you should look at scaling.
Two stores are better than one and ten are better than two. Research on new ideas and ways to leverage the internet to reach more customers.
In conclusion, mutual funds are considered relatively safe investments but they do not guarantee over-the-roof returns.
They are great when you use returns from them to offset bills and other minor expenses but they won’t get you rich quickly!
To take advantage of mutual funds and capitalise on their compounding effect, you need larger capital.
I really enjoyed reading this..very insightful
Thanks so much for this timely information.
This is satisfying 👍
Nice investment article