Mutual Funds as previously discussed in “Understanding Mutual Funds I” are investment vehicles set-up by licensed Professional Fund Managers that can be likened to what some people call “Ajo or Esusu” because they pool money from different investors together. However, unlike “Ajo or Esusu” which just gives back the total amount contributed, Mutual Funds are generally less risky and provide an opportunity for investors, commonly referred to as Unitholders, to capitalise on the power of pooling funds and skills of the Fund Manager to achieve their investment objectives/goals. The unitholders own all the underlying assets and the returns generated by the assets in the Mutual Fund.
In today’s interest rate environment, let’s assume an individual walked into a bank with N5,000,000 for a tenured deposit investment, she/he could probably get a rate of 7% per annum (p.a) for 30days. However, if the same individual took her/his N5,000,000 and pooled it with other investors through a Mutual Fund, the total investable sum would be higher, and as such the Fund Manager would have better bargaining power and could get rates as high as 14% p.a from the same bank for 30days. In other words, the individual would be able to generate higher returns because of her/his investment in the Mutual Fund.
In Nigeria, the Mutual Fund industry is heavily regulated by the Securities and Exchange Commission (SEC). Independent parties aside the professional Fund Manager include Trustees, Custodians, Registrars and Auditors. The separation of roles in the administration of Mutual Funds ensures a high level of transparency, corporate governance, and protection of the interest of the unitholders by investing Mutual Funds in line with the SEC guidelines.
Mutual Funds in Nigeria cater to investors with different risk and return objectives, religious beliefs, age groups and income levels because they assist investors to achieve capital preservation, income-generation and capital appreciation through investments in financial instruments such as money market instruments, bonds, stocks and other alternative asset classes depending on the objective and investment strategy of the Fund. It is important to note that the objective and investment strategy of the different categories of Mutual Funds will be disclosed to determine the category suitable to each investor’s goals and risk tolerance.
In Nigeria, Open-end Mutual Funds are the most popular due to the flexibility to create and cancel units and accommodate more investors based on the bid (buying) and offer (selling) price of the Fund. Open-end Mutual Funds sell units of the Fund directly to investors when they want to invest and buy the units back from investors when they decide to exit the Fund. The bid and offer prices per unit change daily as they are determined by the values of the underlying assets in the portfolio and total number of units of the Fund. However, Money Market Funds mostly reference rates not prices; hence, the price per unit remains constant.
Categories of Mutual Funds in Nigeria include Money Market Funds, Fixed Income Funds, Balanced /Mixed Funds, Equity Funds, US Dollar Funds, Ethical Funds and Shari’ah Compliant Funds. Asset Management companies may differ slightly in terms of subscription (the minimum investment amount or units required), redemption process (withdrawal/exit from the Fund), weighting to different financial instruments (in line with minimum levels set by the SEC), income distributions/returns payment and administrative fees of the Fund.
The general characteristics of the different categories of Mutual Funds in Nigeria have been summarized in the tables below-:
Overview of Mutual Funds in Nigeria
|Overview||Money Market Funds (MMF)||Fixed Income Funds (FIF)||Balanced/Mixed Funds (BF)|
|Product Description||Invested in a broad range of money market securities such as Treasury Bills, Commercial Papers, bank placements, etc. Offer relatively higher interest rates when compared with rates on savings accounts with commercial banks||Focus on investment in a broad range of debt securities issued by the Federal Government of Nigeria, State Governments and highly rated corporate institutions||Invested in a diversified portfolio of high quality Nigerian companies through equities, bonds of Nigerian Federal and State Government and highly rated corporate institutions and money market securities|
|Investment Objective||MMF seek to preserve capital. They maintain a high degree of liquidity by investing in a broadly diversified portfolio of short-term, high quality money market instruments||FIF seek to generate stable income by investing in a diversified portfolio of debt securities issued in Nigeria||BF seek to provide long term capital appreciation whilst mitigating the risk associated with investing primarily in equities through exposure to bonds and money market instruments|
|Portfolio Risk Profile||Cautious (Low Risk)||Cautious (Low – Medium Risk)||Moderate (Medium Risk)|
|Time Horizon||Short term horizon (30- 365 days)||Medium term horizon (2-10 years)||Medium to High term horizon (10 years or more)|
|Income Distribution||At discretion of Fund Manager but may be quarterly||At discretion of Fund Manager but may be quarterly/semi‐annually/annually||At discretion of Fund Manager but may be annually|
|Minimum Investment||At discretion of Fund Manager but may be as low as N500||At discretion of Fund Manager but may be as low as N5,000||At discretion of Fund Manager but may be as low as N5,000|
|Annual Management Fee||0.75%-1.50% of Net Asset Value||1.00%-1.50% of Net Asset Value||1.00%-1.50% of Net Asset Value|
|Rates/Prices||The yield changes daily in-line with the returns generated by the assets in the portfolio||Bid and offer prices change on a daily basis, depending on the value of the portfolio||Bid and offer prices change on a daily basis, depending on the value of the portfolio|
Overview of Mutual Funds in Nigeria
|Overview||Pure Equity Funds (PEF)||Dollar Denominated Funds (DDF)||Shari’ah Compliant Funds (SCF)|
|Product Description||Invest in a diversified portfolio of high-quality Nigerian companies that are domiciled in or carrying out the main part of their economic activity in Nigeria. These companies are usually listed on the Nigerian Stock Exchange. In order to manage liquidity, PEF may invest in short‐term money market instruments and deposits with credit institutions, from time to time||Invest in a broad range of tenured US Dollar denominated debt securities issued by the Federal Government of Nigeria (FGN), Supranational, and highly rated corporate institutions. Some Funds also invest to a limited extent in dollar denominated equities to enhance returns. Dollar denominated money market securities are also invested in to meet liquidity needs||Invest strictly in Shari’ah-compliant instruments and contracts. They invest in Fixed income instruments such as sovereign and sub-sovereign Sukuk, corporate Sukuk, Shari’ah-compliant fixed term investments, Murabaha (cost-plus financing) contracts and Ijarah (lease) contracts. They could also invest in Shari’ah compliant stocks listed on the Nigerian Stock Exchange|
|Investment Objective||PEF seek to provide long‐term capital growth by investing primarily in a portfolio of equities listed in Nigeria||DDF seek to provide income and total returns. They offer potentially higher returns/risk when compared with rates on domiciliary accounts with commercial banks, and aid currency diversification||SCF that are equity-based Funds seek to provide long term capital appreciation whilst the SCF that are fixed income-based Funds provide regular income streams|
|Portfolio Risk Profile||High Risk||Moderate-High Risk||Moderate/High Risk (Fixed Income/Equity Funds)|
|Time Horizon||Long term horizon (Above 10 years)||Medium term Horizon (2-10 years)||Medium /High term horizon (2-10 years/Above 10 years)|
|Income Distribution||At discretion of Fund Manager but may be annually||At discretion of Fund Manager but may be semi-annually/annually||At discretion of Fund Manager but may be semi-annually /annually|
|Minimum Investment||At discretion of Fund Manager but may be as low as N10,000||At discretion of Fund Manager but may be as low as US$1,000||At discretion of Fund Manager but may be as low as N5,000|
|Annual Management Fee||1.00%-1.50% of Net Asset Value||1.00%-1.50% of Net Asset Value||1.00%-1.50% of Net Asset Value|
|Rates/Prices||Bid and offer prices change on a daily basis, depending on the value of the portfolio||Bid and offer prices change on a daily basis, depending on the value of the portfolio||Bid and offer prices change on a daily basis, depending on the value of the portfolio|
Returns on Mutual Funds are not guaranteed and are based on the performance of the underlying assets. Investors can contact any of the licensed Fund Managers at their office locations or any of their communication channels for information on the performance and investment strategy of the different categories of Mutual Funds. (https://fman.com.ng/our-members/)
Information and performance of respective Mutual Funds in Nigeria can also be found on SEC website http://sec.gov.ng/data/) and the Fund Managers Association of Nigeria website. (https://fman.com.ng/archive/)
By Fund Managers Association of Nigeria