FAQs about mutual funds in Nigeria<\/strong><\/h2>\nHere are some of the frequently asked questions with respect to mutual funds.<\/p>\n
1. What are the types of mutual funds I can invest in?<\/strong><\/em><\/p>\nThere are mainly 3 categories of mutual funds:<\/p>\n
I. Fixed Income Funds:<\/strong> 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.<\/p>\nII. Equity Funds:<\/strong> 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.<\/p>\nIII. Mixed-Income Funds:<\/strong> 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.<\/p>\n2. Which is the best mutual fund for me?<\/strong><\/em><\/p>\nThis 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\u00a0are 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.<\/p>\n
3. What is the\u00a0difference between mutual funds and T-bills?<\/strong><\/em><\/p>\nWith 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.<\/p>\n
4. What is the minimum I can invest in a mutual fund?<\/strong><\/em><\/p>\nTypically, 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.<\/p>\n
5. Is investing in mutual funds risk-free?<\/strong><\/em><\/p>\nLike 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.<\/p>\n
6. What kind of returns can I expect?<\/strong><\/em><\/p>\nLet\u2019s 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.<\/p>\n
7. Are my returns tax-free?<\/strong><\/em><\/p>\nNo. 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.<\/p>\n
8. What are open and closed mutual funds?<\/strong><\/em><\/p>\nOpen-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.<\/p>\n
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.<\/p>\n
9. How do mutual funds make money?<\/strong><\/em><\/p>\nWell, 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% \u2013 5% of the Value of the Portfolio<\/p>\n
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