Goddy Egene writes on the benefits of investing in the capital market through mutual funds
The stock market is heading for negative close this year after a growth of 42.3 per cent last year. Expectations were high that the positive performance recorded in 2017 would be sustained in 2018. However, after a major appreciation in the first three weeks of the year, the market has remained on the downtrend. Three weeks to the end of the year, it is obvious that the Nigerian Stock Exchange (NSE) All-Share Index, which is the benchmark indicator to measure the aggregate performance of the market, may decline by over 15 per cent.
The bearish trend in the market, which has continued to depress prices of stocks, is major source of discouragement to existing and potential investors. Given the current risky investment environment, most of the investors do not want to go close to investing in the stock market for now.
However, there is a clever and less risky way to invest in the market and that way is through mutual funds, also known as Unit Trust schemes. Mutual Funds are investment vehicles set up by a licensed professional Fund Manager. Mutual Funds pool monies from members of the public and invest in a diversified group of securities such as stocks, bonds, money market instruments and other assets, which are known as "the underlying investments." Investors, who buy units of a Mutual Fund are its owners and are called Unitholders. Each unit in the Fund allows an investor to own a share of the diversified portfolio of securities managed by the Fund Manager. Asides the Fund Manager, other independent parties such as Trustees, Custodians, Registrars, and Auditors are involved in the administration of the Fund to ensure adequate corporate governance and the protection of investors' interest.
The first Mutual Fund, "Massachusetts Investors Trust", was set up in 1924 in the United States of America and is still in operation. Mutual Funds in Nigeria came to the limelight in the 1990s. Presently, there are over 80 Mutual Funds in Nigeria divided into several categories to cater for investors with different risk and return objectives; religious beliefs; age group and income levels. These categories include Money Market Funds, Fixed Income Funds, Equity Funds, Mixed Funds, Ethical Funds, Shariah Compliant Funds and Dollar Funds.
Features of Mutual Funds
Trust Deed, Prospectus and Factsheets: Every Mutual Fund has a Prospectus that provides general information about the Fund and Parties to the Fund. It is usually shared with prospective investors during the Initial Public Offering (IPO) of the Fund. The Trust Deed stipulates the guidelines of the Fund which must be adhered to by all parties. The Fund Manager also provides factsheets on each Mutual Fund, periodically. The factsheet provides recent information on the Fund and is usually sent to Unitholders as well as hosted on the website of the Fund Manager.
Open-end or closed-end funds: This relates to whether or not a Mutual Fund issues an unlimited or limited number of units. Open-end Funds sell units upon demand at the Offer price and buy units from existing Unitholders at the Bid price on a daily basis (working days). Closed-end Funds have a fixed number of units that are generally traded like shares on an Exchange or Over-the-Counter (OTC) platform. Open-end Funds can also be listed on an Exchange or OTC platform.
Risk and return: The return of a Mutual Fund is usually tracked as the change in its total value as a result of the performance of the underlying investments. There are two ways a Mutual Fund earns returns: The first is from income, in form of interest, or dividends from the underlying investments. The second is from the increase in the price of the underlying investments. A Fund can also decline in value, if the prices of the underlying securities in the Fund decline. Money Market Funds and Fixed Income Funds are usually low risk and invest in fixed income instruments such as Fixed Deposits, Treasury Bills, Commercial papers and Bonds, while Equity Funds and Mixed Funds have higher risk and may invest in variable income instruments such as stocks and alternative assets.
Periodic distribution of income: Mutual Funds distribute income periodically to its Unitholders depending on the guidelines as stated in the Prospectus and Trust Deed. These distributions are done monthly, quarterly or annually.
Fees: The Fund Manager and other parties to the Fund are entitled to periodic fees for the roles played in the administration of the Fund. The fees are expected to cover the cost of administration and professional service rendered.
Benefits of Saving and Investing through Mutual Funds
Mutual Funds make saving and investing simple, accessible, and affordable. The advantages of Mutual Funds over other types of investments are as follow:
Regulatory oversight & corporate governance: The Securities and Exchange Commission (SEC) provides regulatory oversight of Mutual Funds in Nigeria. Furthermore, there is clear separation of roles in the administration of Mutual Funds. The Registrar is responsible for maintaining the register of Unit holders as well as processing distributions to all unit holders in the fund. They are also involved in the processing of redemptions and subscriptions into the fund. The Custodian holds the assets of the fund in favor of the Unitholders while the Trustee ensures the Fund Manager and other parties of the Fund adhere to the guidelines and terms of the Trust Deed.
Attractive returns and periodic distributions: Mutual Funds provide attractive returns to Unitholders. The returns of each Fund is dependent on the universe of asset classes the Trust Deed permits it to invest in.
Professional management: Unitholders of a Mutual Fund have the security of knowing their money is managed by a team of professionals devoted to achieving their investment objectives.
Affordability, diversification and convenience: Unitholders of a Mutual Fund have the ability to invest affordably in a wide range of securities and reap market rewards while achieving portfolio diversification. Investors can access these Funds through several digital/electronic channels without visiting any office. Investors can also initiate their investment with as low as N1,000 - N5,000 for some Funds. This enables investors gain access to some investments they would ordinarily have no access to if they wanted to invest directly.
Variety and liquidity: Although most Mutual Funds have minimum holding periods, investors have the option of redeeming their investments without any penalty after the minimum holding period. There would be usually some days given to process the redemption request. Investors can also select a Fund aligned to their objectives and goals from a variety of Mutual Funds in Nigeria.
Mutual Funds can fit well into your short, medium or long term investment strategy but the success of your plan depends on the type of Fund you choose. As all Funds invest in the securities markets, it is crucial to maintain realistic expectations about the performance of those markets and choose Funds best suited to your needs.