Today, there are on-going conversations about mutual funds and their implications for investor’s portfolios. But this is rather unsurprising. After all, a recent study by Nairalytics revealed that the mutual fund industry asset value was worth N1.38 trillion as of September 2021. And ever since, studies have predicted significant growth over the next couple of years.
Given its growth potentials, we also agree that there must be something in the offing. So, what are mutual funds and how do they work?
What are Mutual Funds?
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.
Under this arrangement, the funds pooled together are overseen by experts known as fund managers, fully accredited by the Securities and Exchange Commission, Nigeria and working together to ensure that investors earn returns.
When investors purchase units under the funds, fund managers pool the funds and manage the investments on their behalf. Each investor’s unitholding represents proportionate ownership of the mutual fund’s portfolio and potential risk and return.
Types of Mutual Funds
There are different kinds of mutual funds you can select to invest in, top of which are:
- Equity Funds (also known as Stock Funds)
- Bond Funds
- Shariah Compliant funds
- Money Market Funds
- Balanced Funds
- Dollar Funds
- Real Estate Funds
- Infrastructure Funds
Benefits of Mutual Funds
Mutual funds allow investors to buy units of the funds, with each unit purchased representing partial ownership of the fund, together with any returns the fund managers are likely to make.
Below are some benefits of mutual funds:
- Diversification: Mutual funds allow you as an investor to invest in different kinds of stock or bonds, thereby diversifying your portfolio.
- Expert Fund Management:: Your funds are managed by experienced and professional personnel known as fund managers, who devise the fund strategies, research potential investments to place the funds into, make trades, and monitor your mutual fund performance.
- Low Cost: Another benefit of mutual funds is that they are relatively affordable and convenient for retail investors. It provides investors with the opportunity to invest in a wide array of stocks or bonds at limited or no transaction fees.
- Dividends/Returns: Most Mutual funds pay dividends to investors periodically. The dividends are shared in proportion to investor’s unitholding in the mutual funds.
Factors to Consider Before Investing in a Mutual Fund
Just as in other investment schemes, it is vital to research certain factors before choosing to invest in mutual funds.
Below are some of such factors:
- Risk Tolerance
Before investing in a mutual fund, it is vital to consider your appetite for risks, as this will guide you while selecting funds with assets and strategies that fit your profile. Assets are classified based on their risk levels, with conservative funds having low-risk assets, while aggressive funds are high-risk assets. Balanced funds offer a bit of both high and low-risk assets.
- Payment of Dividends/Profit
You also need to consider when the fund pays dividend/profit. This could be quarterly, bi-annually, etc. Most funds also offer opportunity for dividend re-investment. So, depending on your financial plan, you need to match dividend payment with your investment goals.
Define the goals you wish to attain with your mutual funds’ investments. Do you intend to use it for your kids’ college education or as your retirement savings? Your answers will aid you in deciding which funds to invest in.
- Investment horizon
How long do you wish the investment to run? Most mutual funds are liquid and you can easily redeem your investments. Though in some funds, you are required to keep your investment for the minimum holding period which may range from 30 to 180 days.
Get Started with Cordros
Investing in mutual funds is a great way to diversify your investment portfolio and earn passive income. But you get a best experience only when you invest with the best in the game.
Cordros Asset Management is a leading financial services group licensed and regulated as Fund Manager/Portfolio Manager by the Security & Exchange Commission (SEC), we have also been recognized as top experts in the mutual funds investment.
Start your investing journey today and give us a call on 07002673767 or email at [email protected].