A Guide To Mutual Fund Investment In Nigeria

Investing in mutual funds is a popular way to build wealth in Nigeria. A mutual fund is a fund managed by professionals that pools money from many investors to invest in securities—stocks, bonds, short-term money-market instruments, other assets, or some combination of these investments. There are about 107 mutual funds in Nigeria, including Bond funds, Equity-Based Funds, Ethical Funds, Exchange-Traded Funds, Fixed Income Funds, Infrastructure Funds, and more. In this paragraph, we will discuss how to invest in mutual funds in Nigeria, including the different types of funds available and the benefits of investing in them.

Understanding Mutual Funds: What they are and how they work

Mutual funds are a popular way to invest and build wealth. They are a type of financial vehicle or entity that pools money from multiple investors. The funds are then used to invest in a diverse range of securities such as stocks, bonds, treasury bills, money market instruments, and other assets. This collection of investments is known as a portfolio of investments.

Mutual funds are operated by professional investment firms or fund managers who are experts in the money and capital markets. These fund managers pool the investors' money and use it to invest in a variety of securities. The profit derived from these investments is then shared with the investors, either annually, semi-annually, or as stipulated in the fund prospectus.

There are two main types of mutual funds: open-ended funds and close-ended funds. Open-ended funds do not have a limit on the number of shares that can be issued, and they are typically unregulated and not traded on stock exchanges. On the other hand, close-ended funds have a set number of shares and are regulated by authorities like the Securities and Exchange Commission (SEC).

Benefits of Mutual Funds

Mutual funds offer several advantages to investors:

• Diversification: Mutual funds invest in a wide range of securities, reducing the risk associated with any single investment or class of investments. This diversification ensures that underperformance in one area does not significantly affect the overall portfolio.
• Professional Management: Qualified professionals carefully analyse and manage mutual fund investments. Their expertise and continuous investment monitoring add value to the investors' portfolios.
• Regulations and Legitimacy: Mutual funds are registered with and regulated by the SEC, providing investors with legitimate and protected investment channels.
• Affordability: Mutual funds have minimal investment requirements, making them accessible to small investors who may not be able to afford shares in larger corporations.
• Liquidity: Open-ended funds allow investors to redeem their investments at any time, providing flexibility and easy access to funds.
• Transparency: Mutual fund investors receive regular updates, including daily Net Asset Values (NAVs), bid and offer prices, and information on the fund's holdings and strategies.

Types of Mutual Funds

There are various types of mutual funds available in Nigeria, including:

• Equity Funds (Stock Funds)
• Shariah Compliant Funds
• Infrastructure Funds
• Bond Funds
• Ethical Funds
• Exchange-Traded Funds
• Fixed Income Funds
• Mixed Funds
• Money Market Funds
• Real Estate Funds

Factors to Consider Before Investing

When deciding to invest in a mutual fund, it is essential to research and consider several factors:

• Risk Appetite: Determine your tolerance for risk as different funds offer a range of risk levels, from conservative low-risk funds to aggressive high-risk funds.
• Dividend Payment: Understand when the fund pays dividends or profits, as it could be quarterly, bi-annually, or on another schedule. Some funds also offer dividend reinvestment options.
• Investment Goals: Define your financial goals and time horizons. Are you investing for retirement, education, or some other purpose? This will help guide your fund selection.
• Minimum Holding Period: Some funds require you to keep your investment for a minimum period, which can range from 30 to 180 days or more.
• Returns and Taxes: Understand the expected returns and how they compare to risk-free investments. Also, note that profits from mutual funds are taxable.

Mutual funds offer a great opportunity to diversify your investment portfolio and build wealth over time. By understanding how mutual funds work, their benefits, and the various types available, you can make informed decisions about investing in Nigeria's growing mutual fund industry.

Types of Mutual Funds

There are several types of mutual funds in Nigeria, each with its own unique characteristics and investment strategies. Here are some of the most common types:

• Open-Ended Funds: These funds do not have a limit on the number of shares that can be issued and are typically unregulated. Investors in open-ended funds can buy or sell shares at any time, and the funds are not traded on the stock exchange.
• Close-Ended Funds: Unlike open-ended funds, close-ended funds have a set number of shares that are sold during the initial public offering (IPO). After the IPO, the fund closes the sale of its shares to the public. Close-ended funds are regulated by the Securities and Exchange Commission and the NSE, ensuring transparency and compliance with rules set by regulatory authorities. The share price of close-ended funds is published daily in newspapers and online.
• Equity Funds (Stock Funds): Equity funds primarily invest in stocks and shares of quoted companies. They offer the potential for high returns but are associated with higher risk.
• Fixed Income Funds: These funds focus on investing in fixed-income securities, such as government treasury bills, which offer a fixed return on investment. Fixed-income funds are considered safe investments but typically generate lower returns compared to other types of funds.
• Mixed Income Funds: Mixed income funds combine elements of both equity and fixed-income funds, offering investors a diversified portfolio with a balance of risk and return.
• Shariah Compliant Funds: These funds operate within the guidelines of Shariah law and the principles of the Islamic religion. They are considered a form of socially responsible investing.
• Infrastructure Funds: Infrastructure funds invest in projects related to infrastructure development, such as transportation, energy, or communication networks.
• Balanced Funds: Balanced funds typically maintain a specified allocation of stocks and bonds, such as a 70/30 ratio. They aim to provide a mix of equity and debt investments, offering both growth potential and income stability.
• Ethical Funds: Ethical funds make investment decisions based on specific ethical factors, such as religious, environmental, social, or governance considerations.
• Money Market Funds: These funds invest in short-term debt instruments, such as treasury bills and commercial paper, with little credit risk. Money market funds are among the least volatile investment options and are suitable for investors seeking capital preservation.
• Dollar Funds: Dollar funds are divided into two categories: Eurobonds and fixed income. They invest in debt instruments denominated in US dollars and offer moderate to medium risk profiles.

Benefits of Mutual Funds

Mutual funds are a great way to invest and build wealth. Here are some of the benefits of investing in mutual funds in Nigeria:

• Diversification: Mutual funds allow investors to diversify their portfolios by investing in different types of stocks, bonds, and other securities. This reduces the risk associated with investing in a single security or class of securities.
• Expert Fund Management: Mutual funds are managed by experienced professionals known as fund managers. These experts devise fund strategies, research potential investments, make trades, and monitor the performance of the fund. This ensures that investors' money is being managed effectively and efficiently.
• Low Cost: Mutual funds are relatively affordable and convenient, especially for retail investors. They provide an opportunity to invest in a wide range of stocks or bonds with limited or no transaction fees.
• Dividends/Returns: Most mutual funds pay dividends to investors periodically, and these dividends are shared in proportion to the investor's unit holdings in the mutual fund.
• Accessibility: Mutual funds offer accessibility to investors who may not have the time or knowledge to invest in the money and capital markets directly. They provide an opportunity to save for the future by investing in a diverse portfolio of instruments.
• Transparency: Mutual funds provide regular updates to investors, including daily Net Asset Values (NAVs), bid and offer prices, information on fund holdings, and fund manager strategies. This transparency helps investors make informed decisions about their investments.
• Regulations: Mutual funds in Nigeria are required to be registered with the Securities and Exchange Commission (SEC) and follow strict regulations designed to protect investors.
• Liquidity: Open-ended mutual funds offer liquidity by allowing investors to redeem all or part of their investment at any time, receiving the current value of their shares.

Factors to Consider Before Investing

Before investing in mutual funds in Nigeria, there are several factors you should consider. Here are some key points to keep in mind:

• Risk appetite: Determine how much risk you are comfortable with. Mutual funds can be classified as conservative (low-risk), aggressive (high-risk), or balanced (a mix of high and low-risk assets). Your risk tolerance will guide you in selecting funds that align with your profile.
• Dividend payment: Understand the frequency of dividend payments, which could be quarterly, bi-annually, or on another schedule. Consider whether you want to reinvest dividends, and match the payment schedule with your investment goals.
• Investment goals: Define your objectives for investing in mutual funds. For example, are you saving for your child's education or planning for retirement? Knowing your goals will help you choose the right funds.
• Investment horizon: Decide how long you want to stay invested. While most mutual funds offer liquidity, some may have a minimum holding period, typically ranging from 30 to 180 days.
• Fund type: Familiarize yourself with the different types of mutual funds available in Nigeria, such as open-ended and close-ended funds. Open-ended funds do not have a limit on the number of shares that can be issued and are usually unregulated, while close-ended funds have a set number of shares and are regulated by the Securities and Exchange Commission (SEC).
• Fund performance and returns: Evaluate the track record and expected returns of the mutual fund. Consider the fund's historical performance and the types of returns they offer. Compare these returns with those of other investment options, such as treasury bills.
• Fees and taxes: Understand the fees charged by fund managers, which can range from 2% to 5% of the value of the portfolio. Also, keep in mind that profits from mutual funds are subject to taxes.
• Regulation and legitimacy: Ensure that the mutual fund is regulated by the SEC, as this provides an extra layer of protection for your investment.
• Investment strategy: Learn about the investment strategy of the mutual fund. Review their prospectus to understand the types of investments they plan to make and ensure it aligns with your goals and risk tolerance.
• Minimum investment: Different mutual funds have varying minimum investment requirements. Some funds may require a minimum investment of N5,000, while others may have higher thresholds, such as N20 million. Choose a fund that fits your financial capacity.

How to Get Started

There are about 107 mutual funds in Nigeria, according to the Securities and Exchange Commission (SEC). Before investing in a mutual fund, it is important to research the various types of funds available and how they work.

Mutual funds are a great way to invest and build wealth, especially for those who don't have the time or knowledge to invest independently. They are also a good way to save for the future. By investing in mutual funds, you get the opportunity to invest in a portfolio of rewarding instruments, rather than putting your money in just one basket.

There are different kinds of mutual funds to select from, including Equity Funds (also known as Stock Funds), Shariah Compliant funds, and Infrastructure Funds. Each fund has its own investment band, with some requiring a minimum investment of N5,000, while others may require N100,000 or even N1,000,000.

When deciding which fund to invest in, consider your risk appetite, investment goals, and the length of time you wish to keep your investment. Some funds have a minimum holding period, which can range from 30 to 180 days.

You can invest in mutual funds in Nigeria using platforms such as the Cowrywise App.

Frequently asked questions