In recent times we have heard a lot about the growing trend in Mutual Funds and the need to invest in such funds for financial security, but most times we have only a vague idea of what this really means. Well it’s time to shed more light. What are mutual funds and why is it worthwhile for us to make investments in these funds? Let us shed some light on these questions.
A mutual fund is an investment solution that allows you invest in different asset classes like treasury bills, bonds, stocks and fixed deposits.
Normally, for an individual investor to be able to play at this high investment level, a lot of capital is needed as well as strong financial knowledge. Mutual funds make it easier & possible.
Now, there is so much financial jargon thrown around that you should understand a bit about, especially if you are a first time investor. So we decided to help educate you
1. Treasury Bills: These are short-term Federal Government backed debt instruments used by the Government to control money supply in the economy. As such, they can be considered as a short-term “loan” to the Federal Government. They are issued every week and these bills are usually for a 91-day tenor with options of a rollover.
2. Bonds: These on the other hand are long-term debt instruments usually with a maturity of 3 years. Generally, a bond is a promise to repay the principal along with interest on a specified date (maturity). The Federal Government, states, cities, corporations, and many other types of institutions sell bonds. Some bonds do not pay interest, but all bonds require a repayment of principal.
3. Stocks: This is when a share of a company/institution/organization is held by an individual or group. Companies raise capital by issuing stocks, and entitle the stock owners (shareholders) to partial ownership of the corporation. Stocks are bought and sold on what is called an Exchange, such as the Nigerian Stock Exchange or the New York Stock Exchange.
4. Fixed Deposits: This is a deposit held by a bank or any other financial institution for a fixed amount of time agreed upon by both parties (the bank and the investor). In exchange for not withdrawing the money during the agreed-upon period of time, the bank pays the depositor an amount of interest than is typically better that what would have been earned from a standard savings or current account deposit.
5. Diversification: This is the allocation of funds across a number of unrelated asset classes to minimize your exposure to risk. It’s a bit like not putting all your eggs in one basket.
6. Asset Classes: These are significantly different investments, and some examples include stocks, bonds, real estate, commodities, precious metals or collectibles.
7. Diversified Portfolio: This is one that is exposed only to specific market risks within certain asset classes and includes a variety of significantly different asset classes. This is almost likened to a portfolio that invests in asset classes that complement each other, are not alike and do not relate. An example is Real Estate, Oil & Gas and Mining.
Mutual funds allow investors to pool in their money for a diversified selection of securities, managed by a professional fund manager. It offers an array of innovative products like fund of funds, exchange-traded funds, Fixed Maturity Plans, Sectoral Funds and many more.
Whether the objective is financial gain or convenience, mutual funds offer many benefits to its investors. Mutual Funds help investors generate better inflation-adjusted returns, because while most people consider letting their savings ‘grow’ in a bank, they don’t consider that inflation may be nibbling away its value.
Probably the biggest advantage for any investor is the low cost of investment that mutual funds offer, as compared to investing directly in capital markets. Most stock options require significant capital, which may not be possible for young investors who are just starting out. Mutual funds, on the other hand, are relatively less expensive.