In Nigeria’s rural areas, local saving happens, called asusu, ajo, or adashe. The names change depending on the part of Nigeria. This saving happens when a group of people come together to contribute money daily or weekly, depending on the agreement. There is a collector. One who is an expert in saving money. The collector moves from the shop or house to collect an agreed amount from each saver daily or weekly. A percentage of the money collected belongs to the collector for the services rendered. In a month or year, the money contributed is distributed evenly to all contributors. The contribution aims to help contributors save a percentage of their income, create access to finance for other small-scale entrepreneurs or invest in other businesses.
This scheme of local savings has some similarities with mutual funds, which involves the pooling of money from many investors to invest in securities such as stocks, bonds, or other securities, done by a professional called a fund manager. To be a credible fund manager, you must be fully accredited by the securities and exchange commission and diligent enough to ensure investors earn a return. The fund manager manages the investor’s collective amount with the primary aim of making significant returns, thereby maximizing investors’ chances of sustainable gains. The ajo or asusu, on the other hand, differ. Its primary aim is to help all the contributors save money,
There are different types of mutual funds, depending on what securities your money was invested in. Simply put, whatever investment the fund manager makes on behalf of the investor determines the fund type. Having understood what a mutual fund means, let’s progress by exploring the various types of mutual funds that are common in Nigeria and their benefits.
- Equity Mutual Fund
Another name for an equity fund is a stock fund. As the name portrays, a stock equity fund is when investors invest money to purchase stocks from different companies. The fund manager, who understands how the stock market works, selects stocks they believe would perform significantly well.
Since they are experienced fund managers, investors are exposed to a lesser risk of having to pick their stocks, which, if done wrongly, would hurt the investor. Also, this type of fund helps diversify investors porta lower customer costs. For instance, investor DKY wishes to be part owner of numerous companies in Nigeria with different stocks of different companies, but he might not be able to achieve that with the amount he has to invest. However, his wish is achievable with the equity fund scheme. Having pooled enough money from various companies, the fund manager has enough funds to spread across various stocks, helping each investor diversify across different sectors.
- 2. Bond Mutual Funds
The bond fund is a type of mutual fund where the fund manager invests in fixed-income assets on behalf of the investors. Fixed income instruments pay investors at a fixed rate within a certain period,
Investing in this type of bond is less risky than equity funds and reduces the stress involved in investing directly in stocks because it has a fixed income with little or no volatility. Although it doesn’t offer as much return on investment as the equity fund, it offers higher returns than the money market fund.
- Balanced Mutual Fund
This type of fund is a blend of other types of funds. The fund manager invests in foreign securities, thereby striking a balance and reducing risk. The fund manager invests in various assets, such as stocks and bonds. For instance, a fund manager can invest 60% in stock and 40% in government bonds. This type of fund enables a steady return, compared to investing only in equity funds,
The primary aim of a balanced mutual fund is to have a mixture of both growth and income, leading to a balanced nature of the fund, suitable for investors with low-risk tolerance. Another name for a balanced fund is an asset allocation fund.
- Money Market Fund
This type of fund is a low-risk investment where investors get regular dividends. It offers safety, easy entry and exit, and generally 24-hour redemption. The money market fund is highly liquid, and the funds may be attractive to investors because they have no loads or costs to leave the fund. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity.
Money Market Funds are low-risk savings products that invest in money market instruments such as treasury bills, commercial papers, bank deposits, etc. The funds are highly regulated to ensure low risk, maintain a stable value, preserve capital, and have low volatility.
- Infrastructure Mutual Funds
More than 60% of the assets in infrastructure equity funds are held in the stock of infrastructure-related businesses.
It focuses entirely on domestic investments in certain sectors of the Nigerian economy, including motorways, healthcare, power, and agriculture.
This type of mutual fund is key to future economic growth.
The Nigeria Infrastructure Fund aims to invest in domestic infrastructure projects that achieve aimed investment rewards and contribute to creating the necessary infrastructure to promote the growth and diversification of the Nigerian economy, draw foreign investment, and generate jobs for Nigerians. Healthcare, transportation, energy and power, water resources, and agriculture are potential investment areas.
Having explored the common types of mutual funds in Nigeria, it’s pertinent to know why you should invest in them. Let’s get to it.
Benefits of Mutual Fund
Effective Fund Management
Since experts manage it, that is, experienced individuals who have keenly researched the securities to place the funds into and monitor the trade without the investor having to bear all the stress.
Accessible to More Investors
Let’s imagine that to invest, you must have a billion naira. The investment would only be acceptable to some. With the mutual fund scheme, more investors with less capital can invest because huge investments are broken into bits. Hence, many investors have access to investing because the fund manager pools funds to match the huge demand.
Diversification
Mutual funds give room for diversified assets. It allows the investor to enjoy a well-diversified portfolio, which allows investment in various stocks or bonds.
Accessibility
Easy accessibility to the fund via electronic platforms and debit cards. You can conduct transactions via physical and electronic channels.
To Sum Up
If you aim to invest in the stock market passively, where you don’t need to be solely involved in the investment, a mutual fund is worth embracing. It will help you stay at ease while experts duly manage your investment. All you need to do is to align with a fund manager who invests in the types of securities that suit your goals and risk tolerance. For instance, it will be wrong to invest in an equity mutual fund if you don’t have risk tolerance due to high volatility.
