Invest in Mutual Funds for Beginners: A Complete Guide
Investing in mutual funds can be a preferred option for beginner investors. Read this article to understand which mutual funds to invest in and the different types of mutual funds available for investment.
Investing in mutual funds can be a great way for beginners in Nigeria to grow their money and diversify their investment portfolio.
A mutual fund is a type of investment vehicle that pools money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional investment manager, who makes decisions on where to invest the money based on the fund's investment objective
One of the key benefits of investing in mutual funds for beginners is that it allows investors to gain exposure to a variety of different assets, which can help to reduce risk. Additionally, mutual funds are generally considered to be more accessible to beginners than other types of investments, as they typically have lower minimum investment requirements and offer more liquidity. However, it's important for investors to do their own research and understand the risks involved before investing in a mutual fund. It's also important to be aware of the cost and fees associated with investing in a mutual fund. Overall, mutual funds can be a great option for beginners looking to grow their money over time.
What Are Mutual Funds?
Mutual funds are like a big piggy bank where many people put in their money. A "money manager" takes that money and buys other things like toys or video games (stocks, bonds, etc.) for the piggy bank. When you have money in a mutual fund, you own a little bit of everything the money manager bought. That way, if some of the things the money manager bought go up in value, then your piggy bank will have more money in it. And if some of the things go down, it will have a little less. But since the money manager spread the money across many different things, it's less likely that everything will go down at the same time. Mutual funds are a good way to save money and it can grow over time.
To summarize, a mutual fund is an investment vehicle that pools money from multiple investors to buy a diversified portfolio of securities.
Who should invest in a mutual fund?
Investing in mutual funds can be a suitable option for a variety of individuals in Nigeria looking to grow their money over time. Here are a few examples of who may benefit from investing in mutual funds:
Mutual funds can be a great option for individuals new to investing. They typically have lower minimum investment requirements and offer more liquidity than other types of investments. Additionally, mutual funds offer diversification and professional management, which can help to reduce risk for novice investors.
2. Long-term savers
Mutual funds are often used for long-term investment goals such as retirement planning, college savings, or buying a house. They can provide a way to consistently save and grow money over an extended period of time.
3. Risk-averse investors
Mutual funds can help to spread risk across a variety of different assets, which can reduce the overall risk of an investment portfolio. This can make them a suitable option for those who are risk-averse and want to protect their savings.
4. Investors looking to diversify
Mutual funds offer diversification across different assets, sectors and geographies. This can help to reduce the risk of an investment portfolio and can provide an opportunity to achieve higher returns.
It's important to note that investing in mutual funds also carries its own set of risks, and like all investments, the value of the investment can go up or down. It's important to do your own research and understand the risks involved before investing in a mutual fund. Additionally, it's important to be aware of the cost and fees associated with investing in a mutual fund, as these can eat into returns over time.
What are the different types of mutual funds?
1. Stock funds
Stock mutual funds are a type of investment vehicle that pools money from multiple investors to purchase stocks in various companies. These funds are managed by professional fund managers who use the pooled money to build a diversified portfolio of stocks. This allows investors to gain exposure to a broad range of companies and sectors, rather than having to pick individual stocks themselves. Stock mutual funds typically have a higher potential for growth compared to bond mutual funds, but also carry more risk.
2. Bond funds
Bond funds are also known as debt funds. These are investment vehicles where the funds are pooled into debt instruments such as corporate bonds, Government bonds and mortgage backed securities. The primary goal of bond funds is to generate monthly income for investors.
This might be a more effective way to invest in bonds. They offer investors immediate diversification.
3. Money market funds
Money market funds in Nigeria are investment funds that invest in short-term, highly liquid assets such as government securities, Treasury bills, and commercial papers. These funds aim to provide investors with a relatively safe and stable return on their investment, while also providing a relatively low level of risk. They are a popular investment option for individuals and institutions looking for a low-risk, short-term investment option. However, it's always important to research and consult a financial advisor before investing in any financial product.
4. Index funds
Index funds in Nigeria are a type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a particular stock market index. These funds are designed to provide investors with a simple, low-cost way to gain exposure to the performance of a broad market or specific market segment, without the need for active management. Some popular stock market indices in Nigeria include the Nigerian Stock Exchange All-Share Index (NSEASI) and the NSE Consumer Goods Index.
Index funds are generally considered to be a low-cost and low-risk investment option, as they are passively managed and do not require the fund manager to make active stock-picking decisions. However, it's always important to research and consult a financial advisor before investing in any financial product.
Mutual Fund Investment Strategies
One of the most common mutual fund investment strategies in Nigeria is diversification, which involves spreading your investment across a variety of different assets to reduce risk. This can include investing in different sectors, regions, or asset classes.
2. Dollar-cost averaging
This strategy involves investing a fixed amount of money at regular intervals, regardless of the current market conditions. This can help to smooth out the impact of market fluctuations on your investment.
3. Value investing
This strategy involves looking for undervalued companies that have strong fundamentals, in the hope that the market will eventually recognize their true worth.
4. Growth investing
This strategy involves looking for companies that have strong growth prospects, in the hope that they will generate high returns over the long-term.
5. Market timing
This strategy involves trying to predict market movements in order to buy or sell at the most opportune time. This can be a high-risk strategy, as it is difficult to accurately predict market movements. It's always important to research and consult a financial advisor before investing in any financial product.
How to buy and sell mutual funds?
To buy and sell mutual funds in Nigeria, you will typically need to follow these steps:
1. Open a brokerage account
The first step in buying and selling mutual funds in Nigeria is to open a brokerage account with a licensed financial institution. You will need to provide personal and financial information, and may be required to complete a risk-tolerance questionnaire.
2. Research mutual funds
Research different mutual funds to find the ones that align with your investment goals and risk tolerance. This includes looking at the fund's performance history, expenses, and management team.
3. Place an order
Once you have selected a mutual fund, you can place an order to buy shares through your brokerage account. You may need to pay a sales charge or commission when buying shares.
4. Monitor your investment
After you have purchased shares in a mutual fund, you should monitor the performance of the fund and the value of your investment. You may choose to sell your shares if the fund is underperforming or if your investment goals change.
5. Place a sell order
To sell shares of a mutual fund, you will need to place a sell order through your brokerage account. The process is similar to placing a buy order and you will typically be charged a commission or sales charge on the sale.
Risks of mutual fund investing
There are some perceived risks of investing in mutual funds. Ensure you conduct adequate research before investing.
1. Market risk
The value of mutual fund shares can fluctuate along with the overall performance of the stock market or other market segments in which the fund invests. This can lead to losses if the market performs poorly.
2. Interest rate risk
Mutual funds that invest in bonds and other fixed-income securities are subject to interest rate risk. This means that if interest rates rise, the value of these securities will decrease, which can result in losses for the fund and its investors.
3. Currency risk
Mutual funds in Nigeria may hold investments denominated in foreign currencies, which can be affected by fluctuations in exchange rates. This could lead to negative returns for investors if the Nigerian currency depreciates.
4. Credit risk
Mutual funds that invest in bonds and other debt securities are subject to credit risk, which is the risk that the issuer of the security will default on its obligations. This can result in losses for the fund and its investors.
5. Political and economic risk
The Nigerian economy is subject to political and economic risks such as inflation, currency fluctuations, and government policies. These risks can affect the performance of mutual funds and the overall market, which can lead to losses for investors.
It is always important to research and consult a financial advisor before investing in any financial product, especially in the Nigerian market, as it is subject to economic, political and regulatory changes and could be risky.
Is there any investment fees for mutual funds?
The investment fees for mutual funds in Nigeria can vary depending on the fund and the financial institution offering it. Some common types of fees associated with mutual funds in Nigeria include:
1. Management fee
This is a fee that is charged by the fund manager for managing the fund's investments. It is typically a percentage of the fund's assets and is taken out of the fund's returns.
2. Sales charge
Some mutual funds may charge a sales charge or load, which is a fee that is paid when buying or selling shares of the fund. This fee can be either a front-end load, which is charged when buying shares, or a back-end load, which is charged when selling shares.
3. Operating expense ratio (OER)
This is a measure of the fund's annual operating expenses as a percentage of its average net assets. It includes all the expense that the fund incurs including the management fee and other expenses such as custodian fees, legal fees, and audit fees.
4. Redemption fee
Some mutual funds may charge a fee if shares are sold prior to a specified time period, such as within 90 days of purchase.
5. Switch fee
Some funds may also charge a fee if you switch from one fund to another within the same fund family.
It is always important to research and consult a financial advisor before investing in any financial product, as the fees may vary and they can have a significant impact on your returns over time.
Why should you invest in a mutual fund?
Mutual funds offer several benefits, such as diversification, professional management, liquidity, and affordability. They allow investors to gain exposure to a diverse range of assets, while also providing the opportunity to obtain a higher return on investment than savings accounts. Additionally, they are easy to buy and sell, and the costs associated with them are generally lower than those of other investment options.
How do mutual funds make you money?
Mutual funds make money for investors through the appreciation of the underlying securities it holds, as well as through dividends and interest payments. Mutual funds also generate income by charging management fees on the assets under management. When the value of the fund's underlying securities increases, the fund's value also increases, and when you redeem your shares, you will receive more money than what you invested.
Additionally, some mutual funds pay dividends to their shareholders, which provide a regular income stream.
There are various mutual funds available in the market for investment in mutual funds. You can make the best pick for yourself based on the risk you’re willing to take in accordance to your long-term and short-term goals. Mutual funds beginners might want to consider balanced mutual funds or equity mutual funds when starting off.