allAfrica.com: Nigeria: Mutual Funds And the Challenges of Bridging Share Investments (Page 1 of 2)

Investment in the nation's capital market has since the past one year, become a topical issue among Nigerians, especially the working class. The discussions often dwell on how to use the capital market or listed equities at the Nigerian Stock Exchange (NSE) to cushion the effects of poverty and seek financial independence.

Most workers, especially civil servants, now see investment in shares as the alternative to pension schemes which they can control and manage for themselves.

The attraction of most capital market operators in this regard stems from the 37.8 per cent investors' annual cumulative returns since 2007, two years after the consolidation exercise in the banking and insurance sectors. According to the NSE, the 2007 national investment climate shows that more than six million Nigerian investors on the capital market during the year under review, grew their disposal incomes by 37.8 per cent.

This compares with the yearly money market interest on deposits that hovers between nine per cent and 10 per cent. But in spite of the favourable returns from the Nigerian capital market in 2007, Mr Chidi Nnamani and Mrs Tomi Adekunle still feel excluded from the opportunities and returns from the NSE investment windfall. Nnamani, a civil servant, and Adekunle, a trader, blame their inability to partake in the 37.8 per cent returns from the NSE in 2007 to their poor disposal income.

According to them, their annual disposal income which lies between N250,000 and N300,000 per year makes it impossible to factor portfolio investments in their scheme of priorities. Although there are other numerous Nigerians who are quietly bemoaning their fate like Nnamani and Adekunle, most stockbrokers canvassed the need for low net worth Nigerians to pull resources together to achieve financial independence.

To the dealers, potential investors should not allow limited funds to constitute stumbling blocks to their dream of investing in the stock market and maximising effective returns.

A brokerage firm, Meristem Securities Ltd, in apparent support for pooled resources toward equity investment, urges potential investors not to be put off by the "hit-the-roof" minimum requirement by stockbrokers for opening a brokerage account. The company also urges investors not to be bordered by the speculator-driven market activities.

The company says that feeding budding investors with ambiguous information had tended to make them helpless in their desire to make it "big" through investing in stocks. But the company says all hope is not lost as investors can participate actively in the capital market and maximise returns from their investments through Mutual Funds or Unit Trust Schemes. Mutual Funds or Unit Trust Schemes provides investment windows of opportunities for low net worth investors to pool their funds together to buy listed shares or other investment instruments in the nation's capital market.

Under the scheme, funds are pooled together from a group of people and invested in stocks, bonds, property, cash and other securities on their behalf. Each investor holds shares which contain a proportion of his or her holding in the fund. Under the mutual funds, investors earn returns through dividends on stocks, interests on bonds, capital gains (via price appreciation) and by selling mutual funds shares for a profit.

The funds are professionally and judiciously managed and invested in various capital and money market instruments to ensure diversified portfolio. Available data in developed economies show that some 80 million contributors invested many trillions of dollars in more than 1,000 mutual funds in 20 years. Mutual Funds or Unit Trust schemes became visible in the Nigerian financial market in the early 1990s with banks acting principally as funds managers. The funds come in varieties of forms with specific investment channels and benefits.

It includes Balance Funds, Money Market Funds, Gilt Funds and Sector Specific Funds. Balanced Funds provide both growth and regular income as the funds are invested both in equities and fixed income securities in the proportion indicated in the offer document.

On the other hand, Money Market Funds are also income funds which provide easy liquidity, preservation of capital and moderate income. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for investing surplus funds for short periods. Gilt Funds are exclusively invested in government securities which have no default risk.

However, the Net Asset Value (NAV) of the schemes also fluctuate due to changes in interest rates and other economic factors. Sector Specific Funds, as the name implies, are invested in securities of only those sectors or industries as specified in the offer documents like health, banking and petroleum sectors.

The returns on these funds are dependent on the performance of the respective sectors.

Experts say that Mutual Funds are moderated by a manager who sponsors, manages and administers such funds according to the investment policy. As a jointly owned fund, contributors are allotted units that are commensurate with the amount invested. Mutual Funds also provide investors the benefit of flexibility and convenience as contributors have the choice of opting for either an open-ended or a close-ended scheme.

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