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|Who Wants To Invest In Mutual Funds by Nobody: 12:36am On Apr 04, 2015|
There are literarily thousands of investment products and opportunities and choosing the ones that are good for you can be overwhelming. In most cases, people end up investing in some products simply because it did well in the paste or because a friend said it was a good investment. We have seen members of different forums asking question and seeking advice on the right investments. While this may not necessarily be bad, the danger is that it may lead to building a portfolio that is not properly allocated based on your personal risk profile and investment objectives. This problem arises because more often than not, people step into the investment supermarket without knowing what the products on sale are. Because there are many investment products and opportunities, this blog will focus on mutual funds.
Mutual funds is an investment that brings together lots of individual investors to pool their money together and put such money under the professional management of a fund manager. The fund manager then selects the specific investments that he or she feels will produce the best performance to meet the stated objective of the respective fund. While some mutual funds invest predominantly in equities, like equity based funds, other may be invested in bonds or fixed income securities or even money market instruments. With a mutual fund, you do not own the underlying securities but you own shares of the respective funds. When you invest in a mutual fund, you become a shareholder of such fund. In
Who are candidates for mutual funds
While mutual funds are open for all to buy into, especially for open ended mutual funds, more importantly, mutual funds are most suitable to those that answer the following three questions in the negative.
(a) Temperament: are you going to stick to a buy and sell strategy when the market is acting crazy? in other words, will you have the courage to buy when prices fall and sell when prices rise?
(b) Time: Do you have the time to do the initial research and constant follow ups required to build and monitor a portfolio of stocks and bonds?
(c) Training: Do you have access to the resources, research, and knowledge that a professional investment manager has?
If you answered no to all the above three questions, you are a candidate for mutual fund investments.
Benefits of investing in mutual Funds
(1) Professional Management: Mutual fund investment avails you the advantage of having your portfolio managed by a professional fund manager.
(2) Diversification: Because a mutual fund may own hundreds of different stocks, bonds, or money market, by investing in such fund, you own a diversified portfolio of everything that the fund invests in.
(3) Liquidity: Except for the lockup period, you can sell your mutual fund investment and except for close end funds, you can buy into mutual funds at will
(4) Simplicity: Mutual fund investing can be as simple as letting someone else, a professional manage your investment for you.
Disadvantage of mutual funds
(1) the major and only disadvantage of mutual fund investing is that you pay management fee and other ancillary fees. Most prospectuses and factsheet provide information on the total expense ratio (TER) and you can shop around for those with lower fees.
The six Cs of selecting mutual Funds
Having answered the T questions in the negative and seen the advantages and disadvantages of investing in mutual funds, it is time to decide on which funds to select. In selecting mutual funds, you should be guided by the six Cs as follows:
(a) Category: The underlying investments in the fund should be in line with your asset allocation and investment objective. Unfortunately, most mutual funds in Nigeria do not disclose their holdings except for Stanbic IBTC Asset managers, ARM, Vetiva. There is no harm in asking for this information.
(b) Commitment: Ensure that the fund manager is committed to the stated strategy or investment process. It is usually more advisable to invest in mutual funds where the fund manager is also an investor. Fortunately, the Nigerian regulators require fund managers to own at least 10% of the fund.
(d) Comparability: Compare the fund's long term track record ( at least 3 years and more preferably five years or more) against the fund's bench mark index and peers.
(e) Cost: Compare the funds expense ratio with those of its peers.
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