Exploring opportunities in mutual funds as viable diversification option
With all the losses incurred in the equities market since, after the 2008 meltdown, which wiped a staggering $1 trillion off the value of the world economy, a major concern among investors in the market has been finding a safe haven for their investment.
This frantic search derived its root from the losses suffered by many investors, who had their fingers burnt following the bubble burst in March 2008, with some of them losing over 70 per cent of their holdings.
Some investors, who ventured into the market with the aim of maintaining a long-term portfolio, at least, for a period ranging between five and 10 years, have remained skeptical over the wisdom of remaining in the market amid the huge losses.
The market capitalisation of the 303 listed equities, which had opened on January 1, 2008, at N10.18 trillion and later appreciated to N12.39 trillion as at March 2008, suffered its highest fall in the 48-year history of the Nigerian Stock Exchange (NSE), depreciating by N3.22 trillion and crashing by 32 per cent to N6.957 trillion by the year-end of that year.
Similarly, the NSE All-Share Index (ASI) depreciated from 63,016.60 points at which it opened in January of that year to 31,450.78 points at the last trading day in 2008. Foreign investors, who realised the danger posed by the on-coming financial turmoil, withdrew their funds, depressing the stock market further, as the ASI shed more than 70 per cent of its value between March 2008 and April 2009.
The situation thus created many liquidity problems for the equities segment and further depressed the market, as these retail investors did not have the purchasing power to patronise the market after the global financial crises.
Analysts linked the major part of the huge losses that investors incurred at the time to the bandwagon effect. They pointed out a large number of investors were investing in the market without seeking the advice of professionals.
According to them, if this had been done, the huge losses incurred by investors during the period would have been averted, at least to some extent.
More importantly, they pointed out that the effect of the meltdown was massive on retail investors because they fail to diversify among various financial instruments to maximize returns on investment.
Regrettably, the option of diversification is a technique, which some investors are yet to come to terms within the nation’s capital market.
In the last few years, regulators and operators have often stressed the wisdom of diversification as the most important component of reaching long-range financial goals, while minimising risk.
Analysts have said that apart from equities, which seem to draw the highest patronage from investors, there are lots of options open to investors in the capital market.
One of the options yet to be fully explored by Nigerian investors is the Collective Investment Schemes (CIS) also called mutual funds.
The scheme, which is usually managed by a fund manager, involves collecting or pooling money from different investors that have a common investment objective and investing such.
It is a form of investment that is accessible to all, where each investor has a proportional stake in the CIS portfolio, based on how much money an individual must have invested or retained in the pool of funds.
The fund manager invests the money by baying treasury bills, stocks, bonds or other securities according to the specific investment objectives that have been established for the scheme.
Usually, in return for putting money into these funds, the investor receives shares or units that represent his or her pro-rata share of the pool of fund assets, while the fund manager charges a fee based on the value of the fund’s assets in return for administering the fund and managing its investment portfolio.
Analysts noted that investing in CIS is one that is accessible to all and the fund managers who manage such funds are usually professionals in fund and portfolio management.
Each investor has a proportional stake hi the CIS portfolio based on how much money they have invested or retained in the pool of funds.
The Vice-Chairman of Highcap Securities Limited, David Adonri, described CIS as a beneficial option in that investors stake their funds in a wide range of securities, which means that risks are fully diversified.
He notes that the CIS can take different forms, including money market funds, fixed-income funds, and equity funds, among others.
According to him, the money market funds, for instance, invest in short-term (less than one year to maturity) corporate and government debt securities, such as treasury bills. Guaranteed Commercial Papers, Bankers’ Acceptance, Certificate of Deposits, while Fixed Income Funds invests in debt securities, such as bonds, debentures or corporate preferred shares that pay regular dividends.
By pooling funds of several individual and corporate investors, a CIS gives investors access to investments that they would ordinarily not have access to. Unlike equities, a CIS is generally not traded on the Exchange but investors buy and sell units to/from the fund manager at any time. Shares are created and sold to new investors on a continuous basis so you can either invest a lump sum or on a regular monthly basis.
The unit price, which is also known as the net asset value, is dependent on the market value of the instruments in which the pool of money is invested, and therefore, rises and falls is calculated daily.
The operation of the entity is based on the principle of the diversification of risk.”
He noted that as against full concentration on just equities, for instance, spreading risks through mutual funds have numerous advantages that are good for the current state of the market.
“The funds, which are managed by highly qualified and experienced investment managers, allow retail investors to buy financial instruments that would normally be out of their financial reach if their funds had not been pooled together. The average CIS portfolio returns compare favorably with returns from other traditional investment products.
“CIS is a flexible form of investment because it gives investors the opportunity to either invest a lump sum or a regular investment each month, in that by investing in a range of underlying assets, the risk is spread among many assets,” he said.
The President of Constance Shareholders Association, Mallam Shehu Makail, said that the structure of the CIS gives investors the opportunity of achieving their varying investment goals.
He notes that usually, the trustees of the schemes invest, based on the interest of the investors, and also provide them with adequate information they may require in the course of making investment decisions.
“A major benefit of investing in CIS is that the units are structured to meet the differentiated investment goals of investors. These funds have trustees, who represent the interest of investors while the fund manager is responsible for investing the fund in assets according to the goals of the scheme.
“Also, it is important to note that this investment scheme is ideal for passive and uninformed investors who rely on the professional expertise of the fund managers to meet their investment objectives,” he noted.
An independent investor, Amaechi Egbo, said that mutual funds can also be beneficial to short-tern investors, giving them the leverage to withdraw from the funds at short notice when there is a pressing need.
“Investing in mutual funds is ideal for conservative investors attempting to optimise cash balances that may be required in a short period of time, as it usually has a capable investment management team with a good level of experience and a well-established investment process.”
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