Mutual Fund: Where to Invest Money You Can’t Afford to Lose
With mutual fund, you don’t necessarily need to take higher risk with your hard earned savings as it makes investing decision sensible for everybody.
Fear of losing out is reduce as fund managers spread out the pool of funds across various investment options, thus provide basis for diversification of earnings.
How does it really work? Mutual funds pool investors’ monies, create a large pool of assets that can be invested in stocks, bonds, or other securities.
Greenwich Trust Limited put it better, the firm said when you investment in a mutual fund, you buy units and become a shareholder of the fund.
Think about it as professionally managed collective investment scheme where you own a fraction of assets under management.
The concepts allows investors with small amount to join with others to mutual funds, with individuals own a pro-rata share of the overall portfolio.
Mutual funds are generally referred to as open ended funds because they have no limit to the number of investors or volume of the units sold in the fund.
How does it really work?
According to Greenwich Trust Limited, the fund sells new units to investors and stands ready to buy back their old units.
More so, the investment firm explained the capitalization of mutual funds is not fixed and they can issue more shares depending on how much the investors want to invest in the fund.
This is unlike unit trusts, the investment manager of the mutual fund actively manages the portfolio, that is buys some securities and sell others in order to exploit market inefficiencies.
Effectively, the price of a mutual fund is determined by the Net Asset Value (NAV) of that fund.
The NAV is the market value of the portfolio including capital appreciation and dividend minus the liabilities of the mutual fund divided by the number of shares owned by the mutual fund investors.
Think about it as what an asset worth after it has been invested, gained from price appreciation in addition to dividend then share among owners.
Therefore, an increase in NAV implies a higher value for the investor of the fund. So, a fund manager that is able to deliver higher value is key to this investment vehicle.
There are fund managers but not all of them are able to maximise return on assets.
Mutual Fund are design to achieve different objectives, with unique investment strategy, investors have opportunities to make choice that serves their needs.
GTL explained that some mutual funds have portfolio which comprises only stocks, bonds, money market securities or a mixture of fixed income securities and equities.
When you are dealing in mutual funds, there are always two price quotes, the offer and bid price.
The offer price is the current price the fund managers will sell a unit of the fund to subscribers, while the bid price is the price they will buy a unit of the fund from shareholders.
So, when you decide to make a subscription, the amount you will pay is what fund managers call offer price.
Bases on portfolio performance, the offer and bid prices changes just as share prices do on the floor of the Nigerian Stock Exchange.
In Nigeria, there have been an increasing number of mutual funds. But performances are not the same. Why? Investment strategies differ and expertise comes to play.
According to GTL Securities, mutual fund operations came to limelight for the first time in early 1990s, as a result of the rapid growth in the financial sector induced by the deregulation policy of the mid-1980s.
It emerged as part of the innovations in the financial markets that followed the policy of deregulation.
Why you should consider it:
Mutual funds allows an investor to diversify his/ her investment that is, the capacity to invest in a wide range of securities.
By spreading investment risk over different securities, mutual funds reduce the risk on a portfolio, says GTL Securities.
Variety:
Mutual funds help the investor meet different investment goals.
There are various mutual funds ranging from conservative to aggressive funds created to meet different investment needs.
So, they can also be classified based on asset class, investment strategy and region.
Expertise:
Good mutual funds are usually managed by highly skilled and qualified investment managers, who have a deep knowledge and understanding of the investment terrain, compared to an ordinary investor.
Mutual funds are particularly ideal for investors who do not have the time nor the skills to efficiently manage their investments.
Lower Cost:
Mutual funds can attract more investors, and therefore more money to manage.
This reduces operating expenses, compared to most closed-ended funds or direct investment in individual securities.
In order to encourage investors to invest in pooled funds, some mutual funds are exempted from certain taxes, which reduce the transaction costs.
Innovations in information management tools enable mutual funds to monitor and manage huge amounts of money from a large number of investors at a lower cost.
High Long Term Returns:
In its explanation, GTL Securities said mutual funds can produce a much better rate of return over the long period than deposits in banks.
Liquidity:
Mutual funds are highly liquid, you can cash in your investments anytime you want, unlike fixed income investments which carry a penalty for premature liquidation.
Supervision:
Mutual funds undergo regulatory scrutiny on a regular basis by the Securities and Exchange Commission, with rules to protect the investors’ investments.
But;
If you invest in mutual funds, you do not have control over the securities bought or sold in the fund.
The fund manager has the sole discretion of investing in whatever securities he/she deems fit, as long as it is in line with the fund’s investment objectives.
Transparency:
Unlike Exchange Traded Funds (ETFs), the individual components of a mutual fund are not know, although, the NAV prices is publicly available.
Volatility:
Mutual funds are also exposed to the market’s volatilities –the extent of which is dependent on the constituents of their positions.
A mutual fund, whose portfolio consists of equities for instance is not exempted from the risk inherent in the stock market.
In most cases, GTL Securities revealed that the fund manager in a mutual fund is unable to guarantee superior returns to the investor.
Therefore, an investor, who chooses to invest in mutual funds may decide to do so for many reasons.
This includes the accomplishment of a long term goal like retirement, or to generate a stream of income.
Whatever the investment goal, there is need for an investor to understand the potential risk and returns inherent in the fund, track record of the fund, and expertise of the fund manager, as well as, the suitability of the fund.
Read Also: ARM Securities Forecasts Nigeria’s GDP to Shrink 1.95%
Mutual Fund: Where to Invest Money You Can’t Afford to Lose
