Nigeria: Tackling Misconceptions About Mutual Funds

20 September 2021

Simple misconceptions about the purpose and benefits of mutual funds have unwittingly created such a myth around this financial derivative to the extent that it has been quite difficult to sell to Nigerians. And the dearth of sustained publicity has helped in no small measure to sustain the myth. The mere mention of a mutual fund among the average Nigerian immediately elicits an indifferent reaction suggestive of a complex derivative designed to address the investment appetite of the rich, which has nothing to offer the ordinary person. Other perceptions as being complicated and offering low returns further restricts interest.

However, virtually every Nigerian, even if unwittingly, understands the concept of mutual funds because it is in sync with indigenous fund generation and management mechanisms. Thrift collection, variously called Esusu, Ajo, Utu, by different ethnic groups, are traditional variants of mutual funds that follow the same principles as the 'oyibo' mutual funds.

Contemporary interpretations of mutual funds have been offered by the regulators of the industry in Nigeria - the Securities and Exchange Commission (SEC) and the Nigerian Exchange Limited (NGX). SEC defines it as "an open-end investment scheme which pools funds principally from small investors for subsequent investment in securities and other financial instruments." According to the NGX, "A Mutual Fund is an investment vehicle made up of a pool of funds collected from numerous investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets."

In essence, a mutual fund is simply a collective investment scheme in which people contribute to a pool of funds that are invested in various instruments. Then proceeds or returns from such investments are shared among the contributors based on the number of units held or amount contributed.

The working of mutual funds, according to one account, is one in which "subscribers to the fund become unit holders, part owners of the fund proportionate to the volume of the fund units they hold. The pooled funds are managed by investment manager who invests the pool of funds contributed by individual subscribers in a number of blue chips or high grade investment options spread across the target market. Targeted instruments include stocks, bonds, properties, cash, debentures, gilts and other securities on behalf of the investors. Investors earn returns through dividends on stocks, interests on bonds, capital gains and by selling their mutual funds shares for a profit. Mutual funds are targeted at both the individual and corporate entities. They range from high networth individuals, retail investors, Pension Fund Administrators, insurance companies, institutional investors/large corporations, endowments and foundations."

The funds are segmented into different categories based on fund types, distribution channel, and investor type. These include equity funds, money market funds, bond funds, fixed income funds, mixed/hybrid funds, real estate funds, ethical funds, exchange traded funds and infrastructure funds.

Mutual funds offer the investor numerous benefits. They are best suited for investors with low-risk appetite. It provides small investors access to professionally managed, diversified portfolios of equities, bonds and other securities. In essence, the individual shareholder participates proportionally in the gain or loss of the fund. As there are quite a lot of securities, investors are less affected if one security underperforms. Also, on account of professional management, investment is made based on a thorough evaluation of the performance and prospects of different securities. This reduces the chances of underperformance. Mutual Funds are highly regulated. In the case of Nigeria, each mutual fund is registered with the Securities and Exchange Commission. Apart from protecting investors, regulation ensures transparency in the system. Affordability is also another advantage because small investors are given the opportunity to buy the shares and become co-owners of big companies. The investor is also guaranteed liquidity as there are provisions to cash out such investment at any time.

The global mutual funds market is quite huge. According to Alliede Market Research, the value of the global mutual funds market stood at $54.93 trillion in 2019 and expected to reach $101 trillion by 2027.

In Nigeria, there are quite a number of very successful mutual funds. The records of the Securities and Exchange Commission (SEC) shows that there are presently 118 approved mutual funds in the market administered by 26 fund managers. Money Market Funds constitute the dominant category, with 42 percent of market share as at March this year. About 56 of the funds are quoted on the NGX. The dominant players, who control over 85 percent of the market are Stanbic IBTC Asset Management Limited, Asset & Resources Mgt. Co. Ltd (ARM), United Capital Asset Mgt. Ltd, Chapel Hill Denham Mgt. Limited, Zenith Capital, Kakawa AM, FAML, FBN Capital and Global Asset Management.

The net asset value of the Nigerian mutual funds market stood at N1.461 trillion in March. Of the various categories, the Stanbic IBTC Nigerian Equity Fund, launched in February 1997, was ranked Number 1 with a net asset value of over N70.2 billion. Other notable mutual funds include ARM Discovery Fund, Vetiva's New Gold ETF, Nigeria Energy Sector Fund, Stanbic IBTC Aggressive Fund, Stanbic IBTC Guaranteed Investment Fund, Coral Growth Fund, Legacy Equity Fund and UBA Equity Fund.

The array of mutual funds presently tradable in the market do not however reflect considerable patronage as there are currently less than 300,000 unit holders in the country, an inconsequential proportion when juxtaposed against the country's almost 200 million population.

This is where public awareness comes into play. Since inadequate information and enlightenment campaigns are largely responsible for the low penetration of mutual funds in the country, then the onus falls on all players in the market, especially the regulators and fund managers, to undertake robust awareness campaigns to trigger and deepen the adoption of mutual funds.

Because one entity may not have the resources or capacity to implement awareness campaigns on a sustainable basis, they could come up with consensual arrangements in which operators are split into different groups. Then theses groups are assigned publicity duties based on the mutual fund value chain. This should be structured in a way that the campaigns run throughout the year. Each phase should have a clear message and measurable outcome. This arrangement should not however supplant targeted stakeholder engagements by individual companies.

What makes enlightenment particularly imperative is because no investor, whether big or small, will willingly stake his money on what he does not understand. Virtually everyone understands investment in equities and do painstakingly monitor the price movement of companies where they have made investments. Mutual funds can attain such acceptance with the right positioning.

In addition to awareness campaigns, players should also offer incentives to potential investors. Among such incentives should include affordable entry subscription, simplification of documentation and processing as well as democratizing the choice of stocks or instruments for investment.

Other challenges attributable to the low penetration of mutual funds in Nigeria are the prevalence of unregistered and unregulated quacks who have devised ways of evading regulation. They often create ponzi or pyramids schemes to swindle the public by offering huge returns from new capital paid by new investors, rather than from profit earned through legitimate sources. In recent times, SEC has intensified efforts to uproot such unregulated entities from the system. The drive should be sustained and reinvigorated in collaboration with other stakeholders, with innovation as key driver. The government should also inspire confidence in the derivatives by investing in them or promoting participation.

Undoubtedly, mutual funds provide a safe channel for diversification of portfolio by discerning investors.

Nwachukwu can be reached via

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