Unnerved By the Market Chill? A Mutual Fund Could Take the Squeeze off You

By SmartProInvesting.com Investing Education Team
May 5, 2008

If you passed off the idea of investing in mutual funds, it was perhaps because you reasoned you could cope well investing for yourself. Fund managers cost money to use and mutual funds have overhead costs that could eat into your earnings. Even without having the expertise of a fund manager, you might reason you could earn returns that match up to what is possible from a mutual fund. In powerfully bullish markets when nearly every stock is galloping up, you probably would get off with a good profit even with a stock selection that is below par. That's the situation every investor is happy with.

All that changes, though, when the market is rocky. Difficult market situations ideally bring out the seriousness in the business of stock investing. A troubled market takes the glamour off and brings out the reality of the risk factor in the stock market. It also points home why the stock selection process needs more that just looking for stocks that will astronomically rise in value in a matter of weeks. The need to weigh all the critical variables becomes sharply important when it gets clear that it’s more than a matter of what gains to achieve, given that there is added concern that money could also be lost. That’s when some expertise begins to count.

Our market is seeing tremendous growth in the number of new entrants as more citizens are getting to see a point in buying shares of companies. That too means that many participants are rookies who haven’t cut their teeth. Some, for instance, are just experiencing a bearish market for the first time. It could be a big jolt to realize that gains are not so guaranteed, after all, at least in the short term.

Well, if you are now worried about how to manage this seemingly not-so-straightforward business of stock investing, here is one good way to take the heat off you: buy into one or more mutual funds.

A mutual fund is a collective investment fund, managed by a professional fund manager. Funds are approved by the Securities and Exchange Commission. Investors buy units of the fund, just as they would buy units of stock of a company. With the fund so pooled together, the fund manager settles into investing on behalf of the fund holders. It’s up to the fund manager to choose what specific stocks to invest in and when to move in or out of any stock. Mutual funds are also called unit trusts in our market and can actually invest in other securities beyond stocks, but each fund clearly defines its investment focus.

The benefits of investing through this vehicle include.

  • The burden of managing the often challenging process is transferred to the fund manager;
  • the experience and professional training of the fund manager is expected to reflect in better investment performance;
  • it provides diversification since pooled funds can be more effectively allocated to asset or stock classes that provide more stability.

If you choose to invest via the fund platform, which options are available to you in our market?

Information from SEC indicates that there are some 34 licensed funds in the Nigerian market today. Most of them are managed by subsidiaries of banks and discount houses, or by stockbroking firms. Here are some facts that could be helpful in making a selection:

  • Only 2 funds – Oceanic Vintage Fund (Oceanic Bank) and Nigerian International Debt Fund (Afrinvest) are categorized as close-ended, which implies that you won’t be able to buy into them any more. The rest are open-ended funds which should continue to take subscription of new units.
  • In terms of current net asset value, the top funds are:
    Fund Manager Net Asset Value N(source: SEC)
    IBTC Nigerian Equity Fund IBTC Asset Management Ltd
    32,819,685,361.77
    IBTC Ethical Fund IBTC Asset Management Ltd
    8,909,999,376.07
    ARM Discovery Fund Asset & Resource Management Ltd
    5,664,537,251.37
    Coral Growth Fund FSDH Asset Management Ltd
    5,582,094,156.52
    FBN Heritage Fund FBN Capital Ltd
    5,241,580,625.00
  • Of these top five, the IBTC Nigerian Equity Fund is the oldest, having commenced running early 1997. It thus has much track record behind it. ARM Discovery Fund has also had some mileage. It has run from December, 2002. The Coral fund commenced August 2004 while the IBTC ethical fund is much younger (2006). The FBN Heritage fund is the youngest and only started in March 2008.
  • Perhaps partly because of their age, the IBTC Equity and ARM Discover funds have amassed large followings in unit holders. While most funds have below 5,000 subscribers, these two boast over 17,000 each as at last count. This is exceptionally remarkable for the IBTC Equity Fund which started at an initial floatation of N1,000/unit. The Discovery Fund started at N100/unit. Most other funds have come to the market at N1.00/unit, excepting FSDH Coral Income fund N100, FSDH Coral Ethical Fund N100, IBTC Guaranteed Fund N1,000, Nigerian International Debt Fund N8,250 and recent Skye Shelter Fund N100.

In choosing a fund to invest in, the factors that count will go beyond the above. Earnings performance, for instance. Charges too. But if you are looking to know where investors have put in more, the above funds have stood out.


 Nigeria's Investment University