August.1.17Personal Finance
MUTUAL FUNDS
Money Matters with Nimi
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Have you been thinking about investing in stocks but aren’t quite sure how to start? Perhaps you don’t have the time or know how to select your own stocks or do not have a very large amount of money to invest. Mutual Funds may be the ideal investment option for you.

What is a Mutual Fund

A Mutual Fund is a portfolio that pools investor’s funds to purchase stocks, bonds, money market and other securities. When you invest in a mutual fund, you own a piece of the total portfolio of securities. The portfolio is then managed by a professional fund manager who handles everything from the day to day management of the fund including research, selection and monitoring of the performance of the fund and its underlying investments.

There are several different mutual funds to choose from. Some invest purely in stocks, some in bonds, whilst others invest in short term money market securities; balanced funds invest in combinations of these categories.

Whether your goal is to give your children an excellent education, to give yourself a secure, comfortable retirement, to buy a new home or to travel the world, mutual funds can help you to achieve your goals. Carefully consider your goals, your risk tolerance, your time horizon, and your financial situation in determining the mutual fund that will best meet your needs.

How much do you need to get started?

Mutual funds usually set relatively low minimum amounts for initial and subsequent subscriptions. You can subscribe to some Mutual Funds from N5,000. This makes it an idea investment product for smaller investors who do not have a lump sum to invest but prefer to set aside funds periodically for long-term savings.

How often should you invest?

Consider a simple cost averaging strategy of systematically investing a fixed sum periodically say monthly or quarterly in a mutual fund. This is a particularly useful method in a volatile market as you can reduce the average cost of your shares by purchasing more shares when prices are low, and fewer shares when they are high. A consistent disciplined approach takes away the speculative element of investing and reduces stress and fear.

Don’t invest in what you do not understand.

Investing without proper knowledge is one of the worst investment mistakes. Every mutual fund publishes a prospectus which is a legal document that provides a great deal of information that you need to know and understand, such as the fund’s investment objective and style, and its fees. Always review a fund’s prospectus before committing your funds. Most mutual funds provide on line access, which makes it easy for you to monitor your investment. Fund bid and offer prices are also quoted in the dailies.

Mutual fund investments are very liquid and you can easily sell or redeem your shares in an open-ended fund at any time; it will usually take a week to receive payment. It is important to note that you can lose money in a mutual fund. With the exception of money market funds, prices of mutual funds will fluctuate.

Mutual funds are not insured or guaranteed by any government agency, however the Securities and Exchange Commission has oversight over the capital market and mutual fund companies must operate under strict guidelines and are managed by professionals.

Invest for your children

One of the most valued and lasting gifts a parent can give a child is the knowledge of investing, and mutual funds are an ideal place to start. Children have the benefit of time, so are in a good position to take advantage of investments that can be left to appreciate in value over several years. Whilst a minor cannot open a mutual fund account, an adult can hold units of the fund on their behalf.
Short versus long-term investing

Do remember that any money that you place in the stock market must be seen as a long-term investment. Funds that you need to set aside for your rent should have been placed in a short-term money market account. If you do not have any other easily accessible funds, you may be forced to sell your shares at a loss to secure your accommodation.

Diversification is an important aspect of investing

It is important to spread your investments over different asset classes, so that a loss in a particular investment may be minimized by gains in another. Mutual funds offer diversification and help you spread your risk.

Volatility and investing go hand-in-hand.

No one can predict what the financial markets will do in the next few days, weeks, months or years. During a bull market greed drives stock prices up; this attracts even more people to the party. On the other hand, investors tend to be fearful during bear markets. Fear creates panic selling, which forces prices downward regardless of a company’s prospects. This presents a buying opportunity as ultimately, that long-term economic value will eventually pull the stock price back up in line with its fundamental realities.

In spite of the fact that the stock market will inevitably go through periods of turbulence, the superior returns of a carefully executed long-term investment strategy can generally outweigh the risks involved.

(from A – Z of Personal Finance by Nimi Akinkugbe)

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