The challenges of savings and investments by Nigerian Millennials have been well documented. These challenges are driven primarily by two main factors – namely, fear and insufficient funds. The fear factor is usually experienced by beginner investors, and is motivated by the anxiety felt due to inadequate knowledge on selecting the right investment instruments. As for the second issue: most Nigerian millennials believe they need to have excess funds before they can welcome the idea of investments.
Mutual funds address these two factors by limiting risks, providing options flexible to a variety of investors and reducing the initial costs associated with making an initial investment.
How do Mutual Funds Work?
A mutual fund is a collective investment scheme that pools money from a variety of investors for the sole purpose of investing in capital instruments and money market instruments. Capital market instruments are usually issued by investment banks, and comprise bonds and stocks which are used to raise long-term capital for various organisations and governments. In the same vein, money market instruments – which consist of treasury bills, certificate of deposits and commercial papers are ultimately used to provide liquidity or short term capital to various organisations and governments.
Investment in mutual funds occurs through the acquisition of shares of the fund at a bid price, known as the Net Asset Value (NAV). Mutual funds can either be open-ended or close-ended. Open-ended funds are open to continuous issuance of shares to investors of the fund. An example of this is FBN Quest and Stanbic IBTC’s money market fund. Investors in the fund who do not wish to participate any further can simply resell their shares to the fund at the existing Net Asset Value. They can also reinvest in the funds whenever they want.
Alternatively, close-ended funds have limited number of shares that are sold at the initial public offering (IPO) to investors of the fund. The fund is regulated by the stock exchange and Securities and Exchange Commission. If an investor wants to exit the fund, he or she can simply put up their shares for sale. The share price of a closed fund is determined by both the value of the portfolio as well as the sentiment investors have towards demand and supply.
Types of Mutual Funds
There are three main categories of funds, which are further customised by various asset management companies (such as Stanbic IBTC, FBN Quest and First City Asset Management) to suit varying risk-aversion levels.
Fixed Income Funds are investments that pay a fixed return on an investment. This kind of fund comprises of money market instruments such as treasury bills and commercial papers, as well as capital market instruments such as FGN bonds, Eurobonds and other debt-like instruments that guarantee a good income stream.
Equity Funds are mutual funds which invest mostly in capital markets through stocks of high-performing quoted companies and, occasionally, private placement. Investments in this fund according to Nairametrics, provide high returns as well as high risks.
Mixed Income Funds are a mix of equity funds and fixed income funds. They are diversified in nature and offer low risk for investors.
Features of Nigerian Mutual Funds
Benefits of Nigerian Mutual Funds
Nigerian mutual funds have several advantages. They:
- Create an alternative means of income;
- Expose fund participant to professional investment management;
- Allow for diversification of investments;
- Reduce transaction costs;
- Are affordable.
Downside of Nigerian Mutual Funds
The major downside of mutual funds in Nigeria is the fact that they are not insured by the Nigerian Deposit Insurance Corporation (NDIC), which insures against loss of customer’s deposit. Nevertheless, the regulation put in place by the federal government of Nigeria, alongside the Securities and Exchange Commission (SEC), guarantee secure and proper management of investors’ funds.
Nigeria’s federal government has recently introduced two additional investment instruments to retail investors’ subscription: the FGN Savings Bond, and the FGN Eurobond. The FGN savings bond is targeted at the everyday saver and mirrors money market instruments. It is also backed up by full faith, thus making the instrument’s risk profile low. The FGN Eurobond is targeted primarily at high net worth individuals and corporate organisations (both local and foreign), with investment in foreign currency. This option is listed on the London Stock Exchange (LSE) and is aimed at improving the current forex situation in the country.
Mutual funds are a veritable investment vehicle that accommodates a wide variety of investors no matter one’s investment style and financial goals. They can offer the advantages or diversification and professional management.