MUTUAL FUNDS: AN ALTERNATIVE INVESTMENT PLATFORM
Mutual funds are funds professionally managed by investment managers who pool money from investors and invest them in different financial instruments including stocks, bonds, and money market instruments in a diversified manner with the financial aim of generating high expected rates of returns.
Mutual funds operations in Nigeria came to the limelight for the first time during the early 1990s, as a result of the rapid growth in the financial sector induced by the deregulation policy of the mid 1980s. They emerged as part of the financial markets innovations that followed the policy of deregulation. Banks engaged in competitive floatation and management of mutual funds then as is happening again presently.
A good number of them closed shop during the financial turmoil that followed and others remained relatively insignificant with limited impact in the capital market until the recent banking consolidation and the financial meltdown that resulted in plunge (depreciation in share price) in the equity market reinforced the investment bankers to start creating new mutual products.
Currently there are more than 20 mutual funds listed on the Nigerian Stock Exchange (NSE) and 16 mutual funds which are not listed on the Exchange.
A major challenge that confronts new entrants in the field of investment is the fear of taking the wrong step in the choice of securities. A beginner usually buys one or two stocks and expects to make the enough profit he has been made to believe that comes from stock market investing. More often than not short-term disappointments happen in place of the profit expected.
This leaves the beginner agonizing over the investments, regretting he has not chosen the more rewarding investment options. He may end up selling his portfolio and moving into another stock expected to do better than the earlier option. Soon the stocks he thought were going to do better also begin to go down.
Mutual funds represent one major vehicle to get share investing right from the start and avoid possible initial disappointments killing the investors' enthusiasm. Mutual funds create a balance between the expectations of returns in a rising market and possibilities of losses when the market falls.
The investment portfolio for a beginner requires being constructed around a diversified group of securities, spread broadly across the market. This will create a low portfolio risk advantage and thus guarantee the level of returns required to transform investments into great wealth over the years.
The financial capacity needed to achieve the standard portfolio diversification is clearly not within the reach of the small investors. Recent market developments have also tended to place new hurdles for the small investor in direct stock market investing. The main restrictive factor is the general increase in the minimum account opening required by stock broking firms which was about N250, 000 during the boom days. This has spurred fresh attempts to establish mutual funds to create an alternative investing window for the small investor but with as low as N5, 000; one can be a unit holder in mutual fund.
The investing activity requires the involvement of experts in deciding what to buy and when to buy or sell. Mutual funds provide a remedy for limited knowledge about stock market investing and inability to select good investments.
They create investing expertise through the appointment of professional managers and make it available to the general investing public. The fund managers are knowledgeable about the market and are in a better position than individual investors to build a portfolio of stocks and other securities and turn them over to take advantage of market developments.
Some market operators in the Nigerian Capital Market have described investment in mutual fund as a good investing strategy that is giving investors greater access to professional fund management.
According to the Managing Director Crane Securities Limited, Mr. Mike Eze 'investors that do not have in-depth knowledge of the capital market nor the time and expertise to analyse and invest in stocks and bonds, mutual funds offer various benefits which include affordable access to expensive stocks, Risk diversification; mutual funds invest in a basket of asset.
Eze who noted that except the investing public begin to access the stock market through investment professional, equities will continue to record huge loss in value and thereby hinder the growth of the securities market said investing in mutual fund will give investors opportunity for professional fund management by fund managers charged with the responsibility of providing them with in-depth research inputs from investment analysts.
A Investment Analyst, Mr. Segun Ademola said the mutual funds enable retail investors to invest in various instrument such that if one is failing, the other holds fit so 'instead of putting all your eggs in one basket, it is now spread across many instruments that may not fall at the same time.'
'The whole idea is to pull together the resources of small investors and be able to make a pool that would afford such investor the opportunity to invest in choice instrument. It is about creating a portfolio, a meek portfolio,' he said.