Treading on the path of low risk with Mutual Funds

With 2013 fast coming to an end, thoughtful persons should be reviewing their activities for the year and thinking of how to fill in the gaps in 2014 and beyond. In the area of personal finance and investments, investors are looking out for better ways of investing their funds or improving their finances while reducing their risks. And one sure way of doing this, according to investment analysts, is to leverage on investment returns from Mutual Funds.

Many investors in the Nigerian stock market have consistently failed to spread their risks in the market resulting from their ignorance of Mutual Funds.

A Mutual Fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities. It is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public.

Mutual Funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds.In about forty-three mutual funds from twenty-three fund managers which the Securities and Exchange Commission (SEC) approved, there are less than 250,000 unit holders. This is a sharply in contrast to the United States market where about 38 percent of households invest in Mutual Funds. In Brazil, about 10 million people invest mutual funds while only 500,000 invest directly in the market.

Considering the importance of Mutual Funds as collective investment vehicles with lower risks, Arunma Oteh led administration at the SEC has consistently advised investors to tread less on the path of risk through mutual funds. Oteh has said she is targeting about 5million investors through mutual funds in a five year period. She hoped to do this through a raft reform step that requires fund managers to report their Net Asset Value (NAV), performance, holding and redemption figures.

“We can categorically state the apex regulator of the Nigerian capital market, has put in a lot of effort to sanitize the market and create more awareness. Another area we must commend SEC is on the issue of transparency. You can find current information on Collective Investment schemes; another name for mutual funds on their website,”

It is estimated that as at early December 2013 the net asset value (NAV) collective investment vehicles or Mutual Funds regulated by the Securities and Exchange Commission is worth about N150billion.

Investors in Mutual Funds derive better benefits when compared to direct investment in individual securities. These include: increased diversification, daily liquidity, professional investment management, ability to participate in investments that may be available only to larger investors, service and convenience, government oversight, and ease of comparison.

Even with these benefits, market analysts are of the view that there is a lot of work to be done with respect to creating awareness especially coming from a background of near-stock market collapse and a period of Ponzi-schemes (also known as wonder-banks), that have eroded investor confidence and developed a negative mindset to anything tagged ‘an investment’.

With less than 250,000 or 5 percent of 5 million investors in the stock market investing through mutual funds, it still calls for more sensitization to save investors from the risks of direct investment in the market.