BusinessDay... the voice of business: You can grow big if you start small with mutual funds

You can grow big if you start small with mutual funds
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NSE AKPAN on 13 April, 2008 12:00:00
 
I wish I could have lots of money so I can invest to build a financial future
for myself’, Daniel lamented to his friend Tolu. “Who told you that you must
have lots of money before you can start investing”, Tolu retorted.
“I approached a stockbroking firm and I was told I need to have up to
N100,000 before I can start to invest in stocks,” Daniel replied feeling very
sad.
The scenario above depicts the difficulty encountered by beginners in the
business of investments. While the average person would want to start building
for the future through investment, he is inhibited by enough capital to begin
with.
You don’t have to despair if this is your challenge, a mutual fund is what
you need to help kickstart your journey in investment.
While investment in company stocks, particularly from the secondary market
requires huge capital, Mutual Funds allow you to invest the barest minimum
amount and gradually grow your investment over time.
Simply put, a mutual fund is a unit trust made up of a pool of investors’
money, managed by a fund manager who invests that pool of money in various
investment instruments. Units are initially allotted and priced to reflect the
overall value of the fund.
Each investor in the fund holds units which represent a portion of the fund,
and subsequent capital gains are reflected in the price of the units. Mutual
funds provide a relatively cheap opportunity for investors to build wealth with
considerably lower risk than direct stock investments and higher potential
returns than fixed income instruments.  Besides mutual funds offer immense
benefits to users of which include the following:
Liquidity: Open-ended mutual funds are highly liquid, and you can cash in your
investments anytime you want (some closed ended funds do have an early
withdrawal penalty), unlike time deposits which carry a hefty penalty for
premature liquidation.
Capital requirement: Unlike other investment instruments which require a
substantial amount of capital, investing in mutual funds is not as demanding.
With as little as N5,000 you can invest in mutual funds. Some funds are even
evolving which allows investment with as low as N3,000 and even this can be paid
in six installments of N500 each. An example of this is the DCVF oil & gas fund.
Diversification: The asset allocation of a mutual fund is usually diversified
over multiple securities. As a result, an under performance in one stock is
unlikely to have a huge impact on the mutual fund. This makes mutual funds more
effective, in managing risk compared to equities, and more profitable than time
deposits.
Administration: This is an especially poignant benefit in Nigeria where
investing in equities directly through the stock market attracts major
administrative issues such as signature verification, verification
documentation, banker’s confirmation, etc. for each individual stock you
purchase. With mutual funds, you’ll receive one certificate (for every
investment you make into the fund).
Professional management: By buying a mutual fund, you are essentially hiring a
professional to manage your money. These managers have investment experience and
as such have greater success with managing your investments than you would.
There are two major ways through which an investor can receive returns and
build wealth through such investments: First, income is earned by the fund
managers from dividend payments on stocks, interest on bonds and capital gains
on instrument sales. A large portion of this income is usually distributed by
the fund managers to the fund holders either in the form of dividends paid out
or bonus shares issued.
Second, like stocks traded everyday on the stock exchange, mutual funds are
highly liquid and are subject to price fluctuations. But unlike the regular
stocks, the price of a mutual fund is usually determined by the Net Asset Value
(NAV) of that fund. So if the NAV increases, the price of the fund goes up,
giving you as an investor an opportunity to sell some or all of your holdings
for a profit.
Many mutual funds exist currently in the country, which prospective investors
can take advantage of to begin to the journey to wealth creation. Some of them
include:
Discovery Fund
The Discovery Fund is managed by Asset & Resource Management Company Limited
(ARM). With as little as N10,000, you can start an investment in the Discovery
Fund. You can also increase your investment by making periodic additional
investment of a minimum of N5,000 each. This is to enable you build up your
investment without putting undue strain on your standard of living.
When your payment clears, the Fund Manager allocates nits to you, based on the
current price of a unit of the Discovery Fund.
DVCF Oil & Gas Fund
This is an open-ended trust scheme designed to enable small investors to pool
fund together for investment in oil and gas sector and venture capital finance.
The Fund was first launched in October 2006.  The Fund allows investors the
liberty to invest minimum of N3, 000 at once or in six installments of N500
each.
FBN Heritage Fund
To invest in the Fund, a minimum of N50,000 being value for 100 units is
required and subsequently further investment would be in multiples of 10 units.
The Fund is an open-ended fund there is no limit to amount that can be invested,
as such investments into the fund can be increased by N10,000 each month.
IBTC Nigeria Equity Fund
The Fund was started in 1997 with an initial price of N1, 000 (nominal value)
This is the largest open-ended mutual fund in Nigeria with a net asset value in
excess of N30 billion. Launched in 1997, the Fund has outperformed the All Share
index of the Nigerian Stock Exchange for 8 out of its 10 years of operation.
This is achieved by investing at least 75 percent of The Fund’s assets in
equities of blue chip companies listed on The Nigerian Stock Exchange while
retaining a maximum of 25 percent of its total assets in money market
instruments.
Minimum investment into the Fund, which has an Average of 50 percent growth
annually, is N50,000
Coral Growth Fund
This is a unitised investment scheme designed for investors with a long-term
investment horizon who seek to achieve capital growth. The fund, which is
managed by FSDH Asset Management Limited, is predominantly invested in large
capitalisation equities quoted on the Nigerian Stock Exchange as well as fixed
income instruments in the Nigerian Money Market. The qualifying investment sum
for this product is N50,000.00.
The CGF is actively managed by highly trained asset managers with a cumulative
experience of more than thirty years in the management of assets in the money
and capital markets.