Taking Advantage of Mutual Funds
Mutual Funds are investment vehicles set up by licenced Professional Fund Managers that can be likened to what some people call “Ajo or Esusu” because they pool money from different investors together.
However, unlike “Ajo or Esusu” which just gives back the total amount contributed, Mutual Funds are generally less risky and provide an opportunity for investors, commonly referred to as Unitholders, to capitalise on the power of pooling funds and skills of the Fund Manager to achieve their investment objectives/goals.
The Unitholders own all the underlying assets and the returns generated by the assets in the Mutual Fund.
In today’s interest rate environment, let’s assume an individual walked into a bank with N5,000, 000 for a tenured deposit investment, she/he could probably get a rate of seven per cent per annum (p.a) for 30 days. However, if the same individual took her/his N5,000,000 and pooled it with other investors through a Mutual Fund, the total investable sum would be higher, and as such the Fund Manager would have better bargaining power and could get rates as high as 14 per cent p.a. from the same bank for 30 days. In other words, the individual would be able to generate higher returns because of her/his investment in the mutual fund.
In Nigeria, the Mutual Fund industry is heavily regulated by the Securities and Exchange Commission (SEC). Independent parties aside the professional Fund Manager include Trustees, Custodians, Registrars and Auditors. The separation of roles in the administration of Mutual Funds ensures a high level of transparency, corporate governance, and protection of the interest of the Unitholders in line with the SEC guidelines.
Mutual Funds in Nigeria cater to investors with different risk and return objectives, religious beliefs, age groups and income levels because they assist investors to achieve capital preservation, income-generation and capital appreciation through investments in financial instruments such as money market instruments, bonds, stocks and other alternative asset classes depending on the objective and investment strategy of the fund. The objective and investment strategy of the different categories of Mutual Funds will be disclosed to determine the category suitable to each investor’s goals and risk tolerance.
In Nigeria, open-end Mutual Funds are the most popular due to the flexibility to create and cancel units and accommodate more investors based on the bid (buying) and offer (selling) price of the Fund. Open-end Mutual Funds sell units of the fund directly to investors when they want to invest and buy the units back from investors when they decide to exit the fund. The bid and offer prices per unit change daily as they are determined by the values of the underlying assets in the portfolio and total number of units of the Fund. However, Money Market Funds mostly reference rates not prices; hence, the price per unit remains constant.
Categories of Mutual Funds in Nigeria
Money Market Funds
Money Market Funds (MMFs) invest in a broad range of short-term high quality money market instruments such as Treasury Bills, Commercial papers and Bank placements. MMFs are low risk Funds which offer relatively higher interest rates when compared with rates on savings account with commercial investors.
Fixed Income Funds
Fixed Income Funds (FIFs) are low to medium risk Funds that generate stable income for investors by investing in a broad range of debt securities issued by the Federal Government of Nigeria, State Governments and highly rated Corporate Institutions.
Balanced Funds (BFs) are medium risk Funds that provide long term capital appreciation whilst mitigating the risk associated with investing primarily in equities through exposure to bonds and money market instruments.
Pure Equity Funds
Pure Equity Funds (PEFs) are high risk Funds that seek to provide long‐term capital growth by investing primarily in the shares of companies domiciled in or carrying out the main part of their economic activity in Nigeria. These companies are usually listed on the Nigerian Stock Exchange(NSE). In order to manage liquidity, PEFs may invest in short‐term money market instruments and deposits with credit institutions, from time to time.
Dollar Denominated Funds
Dollar Denominated Funds (DDFs) seek to provide income and total returns. Invest in a broad range of tenured United States Dollar denominated debt securities issued by the Federal Government of Nigeria (FGN), Supranational, and highly rated corporate institutions. Some funds also invest to a limited extent in dollar denominated equities to enhance returns. Dollar denominated money market securities are also invested in to meet liquidity needs. They offer potentially higher returns/risk when compared with rates on domiciliary accounts with commercial banks, and aid currency diversification.
Shari’ah Compliant Funds (SCF)
Shariah Compliant Funds invest strictly in Shari’ah-compliant instruments and contracts. They invest in fixed income instruments such as sovereign and sub-sovereign Sukuk, corporate Sukuk, Shari’ah-compliant fixed term investments, Murabaha (cost-plus financing) contracts and Ijarah (lease) contracts. They could also invest in Shari’ah compliant stocks listed on the NSE.
Asset management companies may differ slightly in terms of subscription (the minimum investment amount or units required), redemption process (withdrawal/exit from the fund), weighting to different financial instruments (in line with minimum levels set by the SEC), income distributions/returns payment and administrative fees of the fund returns on mutual funds are not guaranteed and are based on the performance of the underlying assets.