As a newbie to the investment space, you’ve probably been hearing a lot of people talking about mutual funds and it’s benefits. Except… there’s one problem, you really do not know what they are so you just can’t understand the whole hype hype around it.
Well, you’ve come to the right place… In this article, we’ll be discussing all you need to know about mutual funds.
First, let’s start with the basics… What is a Mutual Fund?
A mutual fund is a pool of money collected from various investors with the aim of investing in different assets such as stocks, bonds, and other instruments. The trading of assets in a mutual fund is performed by professionals referred to as Fund/Portfolio managers.
Money managers channel the pool of money generated into various asset classes. These actions by the managers are done to generate capital appreciation for the investors. The performance of a mutual fund is measured by its Net Asset Value (NAV). That is, NAV is the market value of the securities held by the fund. The total units of a mutual fund are known as its portfolio and each unit represents the investor’s ownership and entitlements to the gains or losses generated or suffered by the fund respectively.
We are getting a little more technical now…
Now that you understand the basics of Mutual Funds- Here’s how you can invest in them.
The contributions in the fund are managed by professionals who allocate the money into various securities only after conducting careful analysis.
For investors in Nigeria, the Nigerian Exchange Group (NGX) provides a list of mutual funds available for subscription to assist them in realizing their respective investment goals.
It is essential to mention that the profit earned from the diversified pool of investments in a mutual fund is different from investing in the shares of a particular company. In contrast to stock, mutual funds represent investments in many different asset classes instead of ownership in just one asset class.
There are three ways investors can earn a return from investing in a mutual fund.
The first is when return is earned if the fund sells those assets that have increased in value, the fund generates a profit. Another source of return is income earned from dividends on stocks and interest held in the fund’s portfolio. The third source of return to mutual funds investors is if the fund’s shares increase in price.
What are the types of Mutual Funds Available for Investment in Nigeria?
● Equity Funds: This fund invests principally in stocks or equities
● Fixed Income Funds: It focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments.
● Money Market Funds: consist of short-term instruments, usually less than one year such as treasury bills
● Real Estate Funds: are funds that make investments in the housing and real estate sector
● Mixed or Balanced Funds: are funds that have a mix of asset classes such as stocks, bonds, or other instruments. This is usually embarked on to reduce the risk of exposure across asset classes.
● Index Funds: are those that are used to match the return of a major stock market index
As explained earlier, mutual funds have a lot of amazing benefits, some of our favourites are;
● Diversification of portfolio
● Easy access to various assets
● Professional management of portfolio
● Minimal investment requirements.
Just like everything else in life.. while mutual funds are great, they also have some limitations.
Relax… it’s just important that you’re able to weigh your options before investing your hard-earned money. Here are some of the risks involved with investing in mutual funds;
● All investment funds carry some level of risks depending on the performance of the portfolio.
● The potential risks associated with mutual fund investment include:
● High fees and commissions
● Difficulty in comparing the performance of the mutual fund
● Volatility in returns
● No approved regulatory backing by the government deposit agency in Nigeria (Federal Deposit
● Not all mutual funds guarantee your principal and returns e.g. equity funds
There you go, we can go on and on- but that’s a summary of all you need to know about Mutual Funds ! We hope you had an amazing read. Do you have any more questions? Drop them below and we would be glad to explain further.