First, what is a mutual fund?
Basically, a mutual fund can be defined is an entity that pools cash from a variety of investors for the sole purpose of investing the cash in shares, bonds, treasury bills etc. This combination of different investment instrument is called a portfolio of investments.
Usually, the profits derived from the diversified pool of investments are shared to investors in the funds annually or semi-annually or as stipulated in the fund prospectus.
A mutual fund is often operated by professional investment firms made up of people with expertise in the money and capital market.
Mutual Funds in Nigeria: All You Need to Know
In Nigeria, a mutual fund is operated by the investment arm of banks, stock brokerage firms, investment banks etc.
Often times, people confuse mutual fund with a stockbroking firm, but there is a clear distinction between the two.
A stockbroking firm is a firm that uses its license to buy and/or sell shares on the stock market on behalf of a customer. In other words, you are the sole decision maker when it comes to buying and selling shares of your choice. Also, you can keep tabs on the performance of your stocks on a daily basis and monitor its performance independently.
On the other hand, a mutual fund is responsible for making investment decisions. So, in this case, the customer is not the decision maker.
Also, the shares you buy with the mutual fund is that of the fund and not that of the companies quoted on the stock exchange or indeed any quoted investments.
Generally, mutual funds invest in broad and diversified pool of investments which are primarily Money Market and Capital Markets
Money Market includes the likes of Treasury Bills, Certificate of Deposits, Commercial Paper etc. These are debt instruments that come with stipulated interest rates and the principal at a predetermined date.
On the other hand, Capital Markets are markets where Bonds, Stocks (Shares) are traded on a daily basis. So, a Mutual Fund can also use your money to invest in stocks and bonds. For example, when they invest in shares they hope that the value will appreciate thus increase the value of their fund or making them a nice profit when they sell the shares.
If you want to know the type of investments your desired mutual funds use, you can find this information on their prospectus.
Just before you make the decision to invest in a mutual fund of your choice, here are some advantages and disadvantages of this type of investment.
Advantages of mutual funds
- The fund is diversified because it holds many securities which decrease risk.
- Another feature of mutual fund is its daily liquidity as a result, shareholders of open-end funds and unit investment trusts can sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holdings.
- Also, most funds allow investors to redeem in this way at the close of every trading day.
- In addition, mutual fund is a professional investment management as there are portfolio managers that supervise the fund’s investments.
- Also, mutual funds can participate in investments that may be available only to larger investors. This is unlike individual investments that often find it difficult to invest directly in foreign markets.
- Mutual funds are regulated by a governmental body.
- There is transparency and ease of comparison as all mutual funds are required to report the same information to investors, which makes them easier to compare.
Disadvantages of mutual funds
- Mutual funds have less control over the timing of recognition of gains
- Also, the fund has a less predictable income and there is no opportunity to customize your investment.
FAQs about mutual funds in Nigeria
Here are some of the frequently asked questions with respect to mutual funds.
1. What are the types of mutual funds I can invest in?
There are mainly 3 categories of mutual funds:
I. Fixed Income Funds: These are funds that are meant mostly to invest in fixed income securities. Fixed Income Securities are investments that pay a fixed return on an investment. For example, treasury bills offered by the Government are issued at a coupon (rate) of say 10%pa. Meaning, they pay an interest of 10% on any amount invested. Mutual Funds that are Fixed Income Related look out for safe investments that can guarantee a good income stream. They mostly suited for investors with a long term view towards returns. Generally, Fixed Income Funds involves government securities and due to the nature of government securities their returns are typically low but quite safe.
II. Equity Funds: These are mutual funds that invest mostly in stocks and shares of companies are quoted. Some funds can also use fund assets to subscribe shares for private placements. Equity Funds offer high returns but are associated with high risk.
III. Mixed-Income Funds: Mixed-Income funds are a hybrid of Equity Funds and Fixed Income Funds. Because of their diversified nature, they often offer low risk for investors. Low risk, as usual, is associated with low returns.
2. Which is the best mutual fund for me?
This is a matter of personal choice and risk appetite. Closed Ended Funds are regulated by the Securities and Exchange Commission as well as the NSE. They play by the rules set by the regulatory authorities. Their share prices are also published daily on the pages of Newspapers and can also be found on the internet. Open Funds are mostly unregulated and are not traded on the floor of the stock exchange. They are mostly floated by reputable organizations with a track record for performance.
3. What is the difference between mutual funds and T-bills?
With mutual funds you have an opportunity of investing in a portfolio of different instruments rather than having your money in just one basket. For example, your N100, 000 investment in a single mutual fund can represent an investment in bonds, stocks, treasury bills etc.
4. What is the minimum I can invest in a mutual fund?
Typically, mutual funds have an investment band depending on the nature of the fund. Some can be as low as a minimum of N5,000, whilst some can be N100,000 and others N1,000,000.
5. Is investing in mutual funds risk-free?
Like every other business Mutual Funds are also exposed to the same risk and rewards that can determine whether they make or lose money. But since no business originally sets out to lose money they will often tell you that they are profitable. However, you can know how profitable a mutual fund is or can be if the fund owners already have a history. Most of the managers already have experience in running funds and so must have track records of their performance in the past. It is also important that you look at what type of returns they intend to offer to their investors.
6. What kind of returns can I expect?
Let’s take a look at this example. If you have N100, 000 and think you can invest it in any business of your choice and get a profit of 20%, then investing in a mutual fund that promises 14% returns may not be a good idea for you. The return a mutual fund promises you should also be compared to returns one can get on risk-free investments such as treasury bills etc. For example, if a Mutual Fund promises a minimum return of 12%pa and Government Pays interest of 14% on Treasury Bills, then investing yourself may just be a better idea. In general mutual funds will typically offer minimum returns that are benchmarked above inflation rates.
7. Are my returns tax-free?
No. The profit derived from investing in Mutual Funds are not tax-free. Hence you will be taxed on the profit obtained by the relevant tax authority.
8. What are open and closed mutual funds?
Open-Ended Mutual Funds are funds that are open to continuous issuance of shares to investors. Operators of the fund continue to issue shares to the public to buy into the fund. Investors in the fund who do not wish to participate any further will simply resell their shares to the fund at the subsisting Net Asset Value. They can also reinvest in the funds whenever they want. Some Open-Ended Funds also mandate you to keep your money with them for a specified period of time before you can sell or request for your money back. Open Funds are very common.
On the other hand, Closed Ended funds are funds that have limited number of shares that are sold at the initial public offering (IPO). Once the IPO is over, the fund closes sale of its shares to the public. Being a regulated fund, the shares are traded on the stock exchange like the shares of any quoted company. So, if an investor decides he wants his money back he will simply put up his shares for sale. The share price of a closed fund is determined by both the value of the portfolio as well as the sentiments of investors towards demand and supply. This is unlike the Open Funds that are determined by simply dividing the value of the portfolio by the number of shares issues by the fund.
9. How do mutual funds make money?
Well, the Fund Managers are in it for the fees they charge you for helping you invest your money. They sometimes charge you fees upfront when you invest and also charge you a fee when they make a profit on your investment. Remember, profits are declared after deducting from revenue, cost of investments, statutory expenses, taxes, etc. Managers can charge fees ranging from 2% – 5% of the Value of the Portfolio
Top Mutual Fund Managers in Nigeria
Here are some of the top mutual fund managers in the country
Stanbic IBTC Asset Management Limited (SIAML)
SIAML is wholly owned asset management subsidiary of Stanbic IBTC Holdings Plc, a member of the Standard Bank Group, the largest banking group in Afri
Stanbic IBTC Asset Management Ltd is known Fund Management Track record. The firm manages a basket of open-ended mutual funds/collective investment schemes with assets worth billions of naira
Also, Stanbic IBTC is known for its in-depth knowledge and experience of the Local and global markets as well as its well-acclaimed research capabilities
Investing in Stanbic IBTC Mutual Fund is quite transparent as you have real-time online access as well as quarterly reporting. Also, the fund is internally & externally audited annually.
Overall, Stanbic IBTC has a track record of sustainable long-term competitive rate of returns
Stanbic IBTC has also bagged several awards over the last few years. In 2013, it won the World Finance award of Best Investment Management Company in Nigeria 2013
ARM Investment Managers
ARM has a range of mutual funds that cater to different needs and the funds have different levels of risk exposure.
ARM Aggressive Growth Fund: The fund invests primarily in equities and as such seeks to provide superior long-term protection against inflation. The high risk of equities is lowered by also investing in fixed income securities, which provide a fairly predictable income stream and easy access to your money. The minimum initial investment is N50,000 while the minimum additional investment is N10,000
ARM Money Market Fund: The fund invests mainly in money market instruments, such as government treasury bills, commercial papers and bankers acceptances. The Fund is managed to preserve capital and to generate a steady income. The minimum initial investment is N5,000 while the minimum additional investment is N1,000
ARM Ethical Fund: The fund only invests in investments screened by a Shari’ah Advisory Board. The fund will not invest in any company that involves interest-bearing transactions, gambling, alcohol and tobacco, arms and ammunition or adult entertainment. The minimum initial investment is N10,000 while the minimum additional investment is N5,000.
There is also the ARM Discovery Fund provide a fairly predictable income stream and easy access to your money. The minimum initial investment is N10,000 while the minimum additional investment is N5,000
Other notable mutual fund managers include:
- FBN Capital Limited
- United Bank Of Africa (UBA) Asset Management Limited
- Zenith Capital Limited
- Sterling Capital Market Limited.