What to Know about Investing in Mutual Funds
What to know about investing in mutual funds Coronation Asset Management , a wholly owned subsidiary of Coronation Merchant Bank, on October 9 listed three mutual funds on the Nigerian Stock Exchange (NSE) targeting both retail and institutional investors. The three listed funds are Coronation Money Market Fund; Coronation Fixed Income Fund and Coronation Balanced Fund.
Speaking on the funds, Aigbovbioise Aig-Imoukhuede, a Director in Coronation Asset Management said “these funds will guarantee investors’ competitive yields as the business has put together a strong investment management team that will be guided by an investment committee with over 50years combined experience to ensure the funds deliver on the expectations of investors.” The Coronation mutual funds add to the list of mutual funds already listed on the stock exchange offering retail investors opportunities to invest in equity, bonds or a combination of both. However, despite the fact that mutual funds have been around for a while in the Nigeria capital market, not many people understand them. So what are mutual funds?
Basically mutual funds bring together a large group of people and invests their money on their behalf in either equities, fixed income securities like bonds, treasury bills, commercial papers or even a combination of equities and fixed income securities. It is also called a collective investment scheme. It is a form of ‘esusu’ but instead of it being for the purpose of saving the money, this ‘esusu’ invests the money on behalf of its members.
In the case of the Coronation Mutual fund 479 investors have put together a combined total investment of N1.654 billion which Coronation asset management will be investing on their behalf in a Money Market fund. Another 39 investors have put together N315 million for investment Coronation Fixed Income Fund while 64 investors are putting together N198.615m in the Coronation Balanced Fund. Retail investors can invest between N10,000 to N50,000 in the funds.
Typically, the money pulled together to start a mutual fund is broken down into units so that each investor owns a unit of the fund in proportion to the total amount that the investor put in the fund. So in the case of the Coronation Mutual Funds, each unit of the Fund is priced at N1.00. This means that an investor, who invested one million naira in say the Coronation Money Fund, will be given one million units of the fund equivalent to his or her one-million-naira investment.
Normally, investors in funds receive dividends from the fund and can also get capital gains, that is, the value of their investments can also appreciate over time. So, in the case of mutual funds that are invested in equities or shares of quoted companies, the fund will receive dividends from the quoted company at the end of the year. So if a Mutual Fund is invested in say 30 companies, the Fund will receive dividends from all the 30 companies. These dividends will now be paid out to the fund holders as dividends based on the proportion of their holdings in the fund.
It may also happen that the some of the 30 companies that the fund is invested in may see their stocks appreciate in value over the cause of the year increasing the total value of the Fund’s portfolio. This will translate into capital gains for the fund holders. So you are likely to see a fund like the Coronation Mutual Fund that was priced at N1.00 at listing appreciate to say N1.10 at the end of the year. This would be because some of the investments in the Fund’s portfolio has appreciated in value and the fund manager has not also sold down the stocks in the portfolio.
But also note that it can also be that the fund manager has not picked the portfolio investments very well. This can result in a capital loss for investors in a fund so that a fund that was listed at N1.00 per unit can depreciate in a way that at the end of the year, it is selling at say 90 kobo per unit. It is therefore important that when investing in a Fund, an investor examines carefully the track record of the fund manager. Has he managed similar funds elsewhere? How successful was he or she in managing such funds in the past? Asking these basic questions could help in ensuring that the fund you invest deliver profits rather losses.
When investing in funds, also pay attention to the fees charged by the fund manager. The fund manager has to be compensated for managing the funds on your behalf but you have to be sure that the fund management fees are not too on the high side or at least are not out of range with the industry average.
Nonetheless, there are various advantages in investing in mutual funds. The first major advantage is that by buying into a mutual fund, you are getting a professional investment manager to manage your funds on your behalf. This is something you cannot afford if you are investing on your own. Professional investment managers do not come cheap. This investment manager will usually have access to high level research and analysis to help in making intelligent investment decisions. He or she will also be managing the fund on full time basis, a luxury the average retail investor cannot afford due to time and resource constraints.
There is also the often cited advantage of diversification when you are invested in a mutual fund. Mutual funds usually spread their investments over a number of company stocks or financial assets. This reduces the risk of the investment unlike when a retail investor is invested in just one company or asset. When fund managers carefully select financial assets, they are able to largely cancel out the risks in each asset and maximise the returns in the investment portfolio over a period of time.
Buying into a mutual fund is also simple and straight forward. You just call the fund manager and transfer the required amount for the required units and you are part of the fund. The dividends or distribution of profits is paid at the regular intervals as agreed. Some funds, especially money market funds can pay dividends twice a year while others pay once a year. Some funds also give fund holders the option to reinvest their dividends, that way they build their pool of funds over a number of years, which is a great idea if you are investing in a fund for your children.