Monday, May 26, 2014 / Alternative Capital Partners/ Edited by The Analyst
In general, Mutual Funds remain one of the professionally managed investment schemes for pooling funds from various investors together in order to purchase securities. Most mutual funds are "open-ended," and this implies that stockholders can buy or sell shares of the fund at any time.
Benefits of investing through mutual funds compared to direct investing in individual securities are as follows:
Increased diversification as most funds hold many securities; The diversification in funds help reduce risks compared to holding a single stock, bond or other instruments.
Daily liquidity; as shareholders may trade their holdings with the fund manager at the close of a trading day based on the closing net asset value of the fund's holdings.
Professional Investment management; and
Service and convenience
Despite these advantages, mutual funds have certain challenges with respect to its management. The unique challenges include;
Too many mutual fund schemes chasing too few quality stocks;
It is true that one mutual fund scheme especially the equity based mutual fund requires only 20 to 30 companies for investment, but with so many mutual fund schemes around it is becoming more challenging for managers to invest differently.
With this in mind, many mutual funds have ended up investing in companies which have failed miserably and have given below average return which in turn has greatly impacted on its performance.
Nigerian Trading Environment and Regulatory Constraints;
Although the regulation of mutual funds have been put in place to monitor fund managers activities and minimize/eliminate the occurrence of fraud (which in all is in the best interest of the investor), this regulatory clamp, have made fund managers less likely to take risk which then minimizes their ability to make higher returns.
For investors to engage in any mutual fund or go with any fund manager, it is essential to look out for some key facts and they are (but not limited to):
The clarity and consistency of a manager’s investment process
The consistency of portfolio returns
A commitment to customer service.
The Nigerian Capital Market currently has some mutual funds in existence and they are in various types namely Equity based funds, Money market fund, Fixed income fund, Real estate fund, Balanced fund and Ethical fund.