Understanding Mutual Funds

There are many barriers you face as a sole investor especially when you have little capital to invest with. Mutual funds allows you split costs and split profit for maximum returns

There is a certain beauty that comes with sharing or, put clearly, splitting financial burdens.

From sharing apartments with friends so the cost per head is cheaper, to splitting the cost of getting a bottle in a restaurant, to sharing a cab with a stranger you met at the bus stop, the common denominator is that where cost is shared, even the benefit seems better.

In investment, mutual funds hold the key to that magic.

A mutual fund is an investment programme or vehicle that is made up of a pool of funds that have been contributed by a number of investors (typically known as shareholders) for the purpose of making investments in a range of investment vehicles.

These investments could be stocks, bonds, and so on. These funds are usually operated by professionals whose jobs are to find the best investment opportunities and spread invested funds carefully in order to maximize returns.

Why invest in mutual funds?

There are so many reasons why mutual fund investment has become pronounced today. Principally, mutual funds give investors the opportunity to do more with less.

For example, if your rent allowance can only permit you to live in a not-so-fancy area, combining funds with a friend can give you access to a better level of comfort without having to break the bank for it. Other benefits include:

Diversification

Since mutual fund managers have to deal with a large pool of funds, they have to make investment decisions that are carefully hedged and this typically involves getting a balanced portfolio.

Even greater is the fact that since average mutual funds hold hundreds of different securities, mutual fund shareholders enjoy the benefit of diversification at a very low price. Mutual funds spread their holdings across various investment vehicles, reducing the effect any single security or class of securities has on the overall portfolio.

As such, investors are covered and protected from the negative impact of specific investment vehicles.

Convenience & Affordability

There are many investments that you would not be able to make as an investor because you don’t have the required amount of funding. Mutual funds allow you own investment shares to the tune of smaller percentages and you get to do so with ease.

Professional Guide

Without a doubt, these funds are managed by professionals who carefully carry out market research and review the potential securities to invest in. Usually, mutual funds have objectives and their investments are all geared to attaining those specific goals.

Mutual fund accounts are managed by qualified professionals. Where you want to pass on the stress of making investment strategies to the professionals, mutual funds can serve you. They are also duly regulated for your safety as an investor.

In Nigeria, mutual funds are required to be registered with the Securities and Exchange Commission.

Liquidity

Unlike many investment vehicles, it is easier to make withdrawals when you need money. Since there is a constantly flowing pool of investment funding, you can redeem part of your investment as required.

While different mutual funds have different guiding rules behind this, it is a much better option in terms of liquidity as oppose investing in other vehicles.

This isn’t to say mutual fund investments are the best options in town; they have their own disadvantages. One of such is the fee.

Since fund managers are essentially providing you a service, you are required to pay certain fees periodically. These fees differ from organization to organization but the clear downside is that you get to make those payments whether you are making money from your investment or not.

Even worse is that a number of them have hidden fees. Also, issues relating to management might also occur as poor management decisions and inefficiency might cost you your investment.

While mutual funds are great, it is important to know exactly what to expect so as not to be caught unawares. In our next article, we would review some of the best mutual funds in Nigeria.

Written by Lawretta Egba