According to SEC, A mutual fund is an entity that draws cash from many investors with the sole purpose to invest it in shares, bonds and treasury bills (all collectively called a portfolio). The profits from the diversified pool of investments are divided among investors each year or semi-annually, or as stated in the fund prospectus.
Professional investment firms that are skilled in the capital market and money management operate mutual funds. Like Nigeria, mutual funds can be operated by investment banks, stockbrokers, and investment banks. Mutual Fund Comparison Stockbroking firms
Stockbroking firms are simply companies that trade in stocks on your behalf. They use their license to purchase and/or trade shares on your behalf with your permission or instruction. You instruct the brokerage company to buy and sell the stocks of your choice. You can also monitor the performance of your stocks and keep track of it on a daily basis.
But for mutual funds, the firm makes the Investment decisions and determines what shares to buy on your behalf. You have no say in their decision making unlike in a stockbroking firm.
The mutual fund firms have and sell their own stock and not the stock listed on the stock exchange. So the shares they buy on your behalf are theirs and not those listed on the stock exchange market.
What then is the catch?
Mutual funds mainly invest in a large number of diversified investments. These investments are in two groups.
A – Money Market
B – Capital Markets
Money Market: Examples of money market instruments include Treasury Bills and Certificate of Deposits. These instruments mainly include debt securities with collateral to pay the principal at a specific point in time and a fixed interest rate.
Capital Markets: Capital Markets are places where Stocks and Bonds (Shares), are traded daily. Mutual funds can use your money to buy stocks and bonds. They hope that shares will appreciate and increase their fund’s value. If they decide to sell the shares afterwards, they can make a nice profit. But keep in mind that most mutual funds usually describe the type of asset they wish to invest in. You can find this information in the prospectus they give you.
Kinds Of Funds Mutual Funds Invest In
They typically invest in 3 kinds of funds.
Also known as Fixed Income Fund. These funds are designed to invest primarily in fixed income securities. Fixed Income Securities are investments that offer a fixed return.
The Government offers treasury bills at a coupon rate of 10% per annum. They pay 10% interest on all investment amounts. Bond funds are safe investments that provide a stable source of income. These funds are most suitable for investors with long-term profit prospects.
Fixed Income Fund can be considered safe investments because they mostly involve securities in government securities. Due to the nature of government securities, their returns are usually low.
Equity funds are mutual funds that invest primarily in stocks and listed company stocks. Some funds may choose to use their fund assets to subscribe for shares in private placements. Equity funds can provide high returns, but they involve high risks.
Mixed-income funds combine Fixed Income Fund with Equity Funds. They are often low-risk investments due to their diversification. As usual, low risk is associated with low returns.
Reasons Why Mutual Funds Can Be A Good Investment
Mutual funds offer people who have no time or knowledge of exchanging securities the opportunity to still invest and make money. You can invest in mutual funds and have the opportunity to diversify your portfolio rather than having just one investment. Depending on the type of mutual fund, you can invest with as low as 10,000 naira.
Mutual Funds, like all businesses, are subject to the same risks and rewards that could determine whether or not they make or lose money. They will often claim that they are profitable, even though they were not originally set out to lose money. If the fund managers have a track record, it is easier to determine how profitable a mutual fund can be. Managers are likely to have previous experience managing funds so they should have track records. You should also consider what kind of returns they plan to offer their investors.
The amount of returns you receive on mutual funds depends on your risk tolerance. If you have N100k, and believe you can invest it in any type of business and make a profit of N20% then investing in mutual funds that promise 14% returns might not be a good idea. You should compare the return that a mutual fund promises to you with returns one can get from risk-free investments like treasury bills, etc. If a Mutual Fund promises you a minimum return at 12%pa, and Government pays interest of 14% on Treasury Bills then it may be better to invest yourself. In general, mutual funds will offer minimum returns that are above inflation rates.
Mutual Funds and Taxation
The income from Mutual Funds is not exempted from tax. Therefore, you will be subject to tax on any profit received by the relevant tax authority. Mutual Fund investments are not able to be offset by taxable profits.
What is the difference between open and closed mutual funds?
Open-Ended Mutual Funds: These are funds that allow continuous issuance of shares to investors. The fund’s operators continue to offer shares to the public for them to purchase. If investors in the fund do not want to continue participation, they can simply resell their shares at the fund’s current Net Asset Value. Investors can also reinvest their funds whenever they wish. Open-Ended Funds may also require you to keep your money there for a certain period before you can sell it or request your money back. These open funds are very common.
Closed-Ended Funds: On the other side, funds with a limited number of shares are sold at the Initial Public Offer (IPO). After the IPO ends, the fund sells its shares to the general public. The shares can be traded on the stock market as any other quoted company because they are regulated funds. If an Investor wants his money back, he can simply sell his shares. Closed funds’ share prices are determined by the value of the portfolio and the sentiments of investors about demand and supply. This is in contrast to Open Funds, which are simply divided by the number of shares issued by the fund.
Which one is the best?
It is up to you and your risk appetite. Closed-ended funds are regulated by both the Securities and Exchange Commission and the NSE. They follow the regulations set forth by regulatory authorities. They publish their share price daily in newspapers and on the internet. Open Funds are generally unregulated and not traded on the stock exchange floor. They are usually floated by well-respected organizations with a proven track record of performance.
What’s in it for fund managers?
Fund managers are paid a fee to help you invest your money. Fund Managers may charge fees upfront to invest, and a fee if they make a profit. Profits are not declared until revenue, costs of investments, taxes, and other expenses have been deducted. Managers may charge fees that range from 2% to 5% of Portfolio Value
Top 12 Mutual Funds To Invest In Nigeria
It’s one thing to wish to invest in mutual funds, but it is quite another to do so in very well. This article will highlight the top Nigerian mutual funds in no particular order. *
It’s one thing to pool funds with friends to purchase a better home than you could afford on your own. But it’s quite another to find the most desirable house available.
We have already highlighted the benefits of investing in mutual funds in our previous article. All of these benefits, such as a diverse portfolio and the ability to invest in vehicles that you might not otherwise be able to afford would be negated if you sign up for the wrong mutual fund company.
Here is a list of the top mutual funds in Nigeria, ranked by their performance over the last few years.
#1: Stanbic IBTC Aggresive Fund
This fund is very popular because of its competitive returns, spread for diversification, liquidity provision and a stable threshold for low to medium volatility. This fund is part of Stanbic umbrella funds. This Stanbic IBTC umbrella fund also includes the Stanbic Conservative and Stanbic Absolute funds. They showed that the fund typically invests at least 60% in the stock market and then 40% is invested in fixed income securities.
Although the Stanbic IBTC Aggresive Fund is awesome, it is still not for risky investors. Your conservative portfolio will be safer if you have a low risk appetite. If you are extremely risk averse, the Absolute Return Portfolio is a good option. You invest 100% in fixed income securities and you will not lose any money. Stanbic Asset Management manages the funds and you can begin investing with as little as N5,000
#2: Meristem Equity Market Fund
This Fund falls under the Meristem Wealth Management Limited. It focuses on equity securities in NSE. This mutual fund is open-ended and requires an initial investment of N10,000.
Customers have been praising them for providing high yields and high net assets value. They also praise their customer service and relationship management skills. You can also apply as a corporate entity/entity, or jointly depending on the nature and purpose of the group.
#3: FBN Smart Beta Equity Fund
FBN Smart Beta Equity Fund suits investors who want to build long-term wealth. They are looking for high-risk investors with long-term goals. The minimum investment is N50,000.
It is an equity-based fund. This is because it invests in stocks from all sectors listed on the Nigeria Stock Exchange. It offers attractive returns due to its highly researched-based and well-tested evaluation methods.
Their spread is that they can provide capital preservation through long-term capital preservation. They invest at least 75% in diversified portfolios and, for liquidity purposes, 25% in short term money market instruments.
#4: EDC Fixed Income Fund
The EDC Fixed Income Fund only invests in fixed income instruments. It is ranked as one of the top three Nigerian mutual funds on various platforms. You can invest in a variety of fixed income vehicles, including bank placements, bonds, and commercial papers. Designed for those less at risk than others or those willing to take a small risk.
The purpose of the Fund is to provide liquidity and liability management to investors while avoiding potential risks associated with equity investments.
This fund has two investment funds at Ecobank, the EDC Fixed Income and the EDC Money Market Fund. The money market fund requires a minimum capital of N5,000 while the bond fund requires a minimum capital of N50,000.
#5: Stanbic IBTC Nigeria Equity Fund
The Stanbic IBTC Aggresive Fund is targeted at high-net-worth individuals, as you can see. Stanbic IBTC also offers mutual funds that nearly anyone can invest in. Stanbic IBTC Nigeria Equity Fund is one such fund.
Stanbic IBTC Nigeria Equity Fund, an open-ended mutual fund, is designed to provide liquidity and long-term attractive returns. SINEF invests at least 70% in equities and as much as 30% in fixed income securities.
SINEF has an investment minimum of N5,000.00 and a minimum holding period of 91 days.
#6: Vetiva NewGold ETF
NewGold Exchange Traded Fund is a Mutual Fund that tracks gold’s Rand (SA) prices. Investors have the chance to invest in listed securities that are fully backed with gold bullion. Each NewGold security represents approximately 1100 ounces of real gold. Brinks limited is the custodian of the gold and keeps it in a vault.
Since the Covid-19 pandemic, gold prices have risen. Gold prices tend to rise in times of uncertainty. Based on its high returns, Vetiva’s NewGold fund has been one of the most popular mutual funds in Nigeria.
The NSE (Nigerian stock exchange) is where NewGold ETF trades.
#7. Vantage Balanced Fund
Investment One’s Vantage Balance Fund is a mixed mutual fund focused on Equities, Fixed Income, Money Market and Real Estate assets.
Vantage Balanced Fund aims to maximize long-term capital growth and maintain regular income distribution. VBF is a mutual fund in Nigeria that suits medium risk investors. It offers a great mix of investment assets. The minimum subscription amount is 10,000. You can also invest in multiples N1,000.
#8. Legacy US Bond fund
FCMB’s Asset Management Legacy US Bond fund, a high-returns mutual fund that is US Dollar-denominated, has been registered with Securities and Exchange Commission. The Legacy US Bond fund can be viewed as a US Dollar-denominated Collective Investment Scheme.
LUSBD invests fixed-income securities in US Dollars. These securities can be issued by the Nigerian government, supranational bodies, and corporate entities. Eurobond is one of these securities.
LUSBD’s goal is to provide a stable income for the long term. LUSBD does not guarantee capital protection. This means that you could gain or lose on your investment.
Legacy US Bond fund Minimum Initial Subscription is 5,000 Units with a Minimum Investment Period of 6 Months USD. This provides stable income and a great way to hedge against Naira depreciation.
This fund is a convenient way to save for medium-to-long-term goals. The Fund is free from currency risk as all inflows and investments are made in US Dollar. All dividend income from investments is paid in US Dollar.