Mutual Funds, an entity that pools cash from a variety of investors for the sole purpose of investing it in shares, bonds, treasury bills , afford people the opportunity to invest in the money and capital market, particularly if they are the type that have no time or do not know much about the business of buying and selling securities and make money.
It also gives them an opportunity to save for the future. By investing in mutual funds, you have an opportunity of investing in a portfolio of heterogeneous instruments rather than having your money in just one basket. For example, your N100,000 investment in a single mutual fund can represent an investment in bonds, stocks, treasury bills etc.
The profit derived from the diversified pool of investments are shared to investors in the funds annually or semi annually or as stipulated in the fund prospectus.
Who operates a mutual fund?
Mutual Funds are operated by professional investment firms made up of people who are savvy with the money and capital market. Mutual Fund, like in Nigeria can be operated by the Investment arm of banks, stock brokerage firms, investment banks etc. They determine which Investment decisions to make rather than you giving them instruction on what shares they should buy for you or which one you intend to sell. The shares you buy with the Mutual Fund is that of the fund and not that of the companies quoted on the stock exchange or indeed any quoted investments.
Mutual Funds mainly invest in broad and diversified pool of investments in both money and capital markets. Example of money market instruments are treasury bills, Certificate of Deposits, Commercial Paper etc., while the capital market instruments include Bonds, Stocks or shares. So, a Mutual Fund can also use your money to invest in stocks and bonds. For example, when they invest in shares they hope that the value will appreciate thus increase the value of their fund or making them a nice profit when they sell the shares. But most mutual funds usually outline the type of investments they hope to invest your money in. This can be found in their prospectus.
There are mainly three categories of funds on which they typically invest. These are Fixed Income Funds , Equity Funds and Mixed Income Funds
Fixed Income Funds are funds that are meant mostly to invest in fixed income securities. Fixed Income Securities are investments that pay a fixed return on an investment. For example, treasury bills offered are issued at a coupon (rate) of say 10 per cent pr annum. This means that they pay an interest of 10 per cent on any amount invested. Mutual Funds that are fixed income related look out for safe investments that can guarantee a good income stream. They mostly suited for investors with a long term view towards returns.
Equity Funds are Mutual Funds that invest mostly in stocks and shares of quoted companies. Some funds can also use fund assets to subscribe shares for private placements. Equity Funds offer high returns but are associated with high risk.The third one is Mixed Income Funds.
Mixed Income funds are a hybrid of Equity Funds and Fixed Income Funds. Because of their diversified nature, they often offer low risk for investors. Low risk, as usual, is associated with low returns.
How much can I give them?
Mutual Funds typically have an investment band depending on the nature of the fund. Some can be as low as a minimum of N5,000, while some can be N100,000 and others N1million.
Is it profitable?
Like a every other business Mutual Funds are also exposed to the same risk and rewards that can determine whether they make or lose money. But since no business originally sets out to lose money, they will often tell you that they are profitable. However, you can know how profitable a mutual fund is or can be if the fund owners already have a history. Most of the managers already have experience in running funds and so must have track records of their performance in the past. It is also important that you look at what type of returns they intend to offer to their investors.
What kind of returns can I expect?
This depends on your risk appetite. For example, if you have N100, 000 and think you can invest it in any business of your choice and get a profit of N20 per cent, then investing in a mutual fund that promises 14 per cent returns may not be a good idea for you. The return a mutual fund promises you should also be compared to returns one can get on risk free investments such as treasury bills etc. For example, if a Mutual Fund promises a minimum return of 12 per cent per annum and the Federal Government pays interest of 14 per cent on Treasury Bills, then investing may just be a better idea. In general mutual funds will typically offer minimum returns that are benchmarked above inflation rates.