Deciding where to invest N1 million in 2025 requires a strategic approach.
With inflation at 34.60% as of November 2024, the priority is not just returns but real returns; those that outpace inflation.
The time value of money highlights the need: N1 today is worth more than N1 tomorrow.
If your investment does not provide returns above inflation, you are effectively losing money.
Additionally, the investment environment is shaped by liquidity, capital preservation, and risk appetite.
Albeit the choice of investment outlet boils down to other key considerations: your age, your investment objectives, etc.
These factors are interrelated, form the foundation of any sound investment strategy, and must guide any decision, as chasing high returns without considering the risks can lead to significant losses.
That said, let us explore the performance of various asset classes, outlooks, and which ones may offer the best investment opportunities for the year.
Equities: High risk, high reward?
The best place to invest N1 million in 2025 would be a diversified portfolio consisting of various sectors; oil and gas sector stocks, such as Seplat, Conoil, and Aradel, insurance sector alongside banking sector stocks.
While banking stocks underperformed in 2024 compared to 2023, the principle of “buy low, sell high” presents an opportunity to capitalize on potential recovery and growth in the sector.
With the current inflation rate, there are very few asset classes in Nigeria that offer positive inflation-adjusted returns.
- Equities, however, have proven to be a notable exception. In 2024, the Nigerian Exchange (NGX) showcased remarkable resilience despite challenging economic conditions.
- The All-Share Index (ASI) posted an impressive 37.65% year-to-date (YtD) gain, outperforming the inflation rate.
- Notably, in 2024, about 70 stocks delivered YtD returns exceeding the November 2024 inflation rate, highlighting their status as inflation-protected investments.
- This trend followed a similar performance in 2023, where about 91 stocks outpaced the inflation rate of 28.92%.
Additionally, these stocks provide an added incentive for investors, with dividend yields ranging from 2% to 12%, combining capital appreciation with income generation.
However, equities are notoriously volatile. A bullish year does not guarantee a repeat.
- Notwithstanding, equities can yield significant returns for those willing to endure short-term volatility.
- For younger risk-tolerant investors, 50% of the N1 million should be invested in a diversified portfolio focusing on high-growth sectors.
ETFs: Diversified exposure or limited upside?
Another asset class to consider is exchange-traded funds. ETFs offer an attractive middle ground, providing exposure to a basket of securities while spreading risk. There are twelve ETFs on the NGX right now.
- For instance, the Vetiva Banking ETF mirrors the banking sector’s performance, allowing investors to benefit from sector-wide trends.
- However, the returns of ETFs are inherently tied to the performance of their underlying assets. Vetiva Banking ETF delivered a -6.14% return in the first half of 2024, reflecting the weak performance of the banking sector index during that period.
- This contrasts sharply with the impressive 109% YtD return it achieved in 2023, highlighting how sector-specific ETFs can underperform in challenging market conditions.
Given these factors, putting the entire N1 million here exposes you to risks, especially in volatile or underperforming sectors. However, it is capable of giving a positive real return.
Fixed-Income investments: A stable but limited option
Fixed-income instruments like Treasury Bills, Commercial Papers, and FGN Bonds are staples for conservative investors.
- In 2024, these investments offered attractive yields of 20–30%, driven by rising interest rates. For example, Treasury Bills closed the year at an average yield of 25.5%, and FGN Bonds yielded 19.75%.
- In a statement, the CEO, Stanbic IBTC Asset Management; Busola Jejelowo, stated that the fixed income market returns remained elevated with money market and bond yields at 20% level by year-end as FX volatility and Naira depreciation led to an increased investors’ appetite for Dollar denominated investments
- The Central Bank of Nigeria’s aggressive interest rate hikes, totaling 875 basis points, boosted fixed-income returns, attracting significant investor interest.
However, these returns barely outpaced inflation, which stood at 34.60% in November 2024, resulting in limited or negative real returns.
Additionally, rising rates in 2024 may reverse in 2025, potentially reducing yields and leading to mark-to-market losses on existing holdings.
Fixed-income investments are ideal for stability and steady cash flow, but they may not generate real returns in a high-inflation environment.
A better strategy is not to invest the N1 million in fixed-income investment but to adopt a diversification strategy of allocating about 30%.
Mutual Funds
If the prospective investor has a low-risk appetite, then mutual funds are also an option to consider with a low-risk appetite.
There are money market mutual funds, equity mutual funds, fixed-income mutual funds, Dollar mutual funds, real estate investment trust funds, etc.
They are professionally managed and offer the opportunity to diversify across different financial markets.
- But then let us look at the return in 2024. The return on mutual funds hovered between 7.5% – 38% for the year. For instance, Stanbic IBTC Dollar funds, Money Market Funds, and Equity funds generated a return of 7.5%, 21%, and 38% respectively for the year.
While some funds delivered strong returns, many failed to outpace Nigeria’s inflation rate, leading to negative real returns for investors in lower-performing funds.
- For instance, Securities Exchange Commission funds’ valuation report as of December 2024, shows that the equity mutual fund has an average YtD gain of 29% with Halo Equity Fund posting as high as 87% YtD return.
- Mutual funds are a strong choice for investors seeking professional management and diversification with varying risk appetites.
- However, selecting the right type of fund is critical to achieving inflation-beating returns.
High-performing equity funds or mixed funds may be more suitable for growth-focused investors, while money market funds provide stability for conservative investors.
Overall, there are no one-size-fits-all investment strategies in 2025. Based on key considerations, a diversified portfolio offers the best chance of achieving real returns while managing risks:
- 50% in equities for high-growth potential, focusing on resilient sectors.
- 30% in fixed-income securities for capital preservation and predictable income.
- 20% in ETFs or mutual funds for diversification and professional management.
