Business

Investment stability: Need to develop mutual fund segment

Mutual funds are the right platform that will stabilise investment since it can attract and encourage numerous retail investors. Chris Ugwu writes

 

 

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utual funds or collective investment scheme represents major vehicle to get share investing right from the start and avoid possible initial disappointments killing investors’ enthusiasm.

 

 

These funds create a balance between the expectations of returns in a rising market and possibilities of losses when the market falls.

 

 

The investment portfolio for a beginner requires being constructed around a diversified group of securities, spread broadly across the market. This will create a low portfolio risk advantage, thus guarantee the level of returns required to transform investments into great wealth over the years.

 

 

Mutual funds operations in Nigeria came to limelight for the first time during the early 1990s, as a result of the rapid growth in the financial sector induced by the deregulation policy of the mid 1980s.

 

 

They emerged as part of the financial markets innovations that followed the policy of deregulation.

 

 

Banks engaged in competitive floatation and management of mutual funds then as is happening again presently.

 

 

A good number of them closed shop during the financial turmoil that followed and others remained relatively insignificant with limited impact in the capital market until the banking consolidation and the financial meltdown that resulted in a plunge (depreciation in share price) in the equity market.

Market analysts are of the view that mutual funds provide the means to connect the current apathy in savings and investment.

 

 

They argued that this became necessary following the downturn the Nigerian capital market had witnessed, which resulted in investors experiencing heavy losses in investments, leading to the apathy by investors and lull in activities at the stock exchange.

 

 

They believe mutual funds are the right platform to attract and encourage numerous retail investors as majority of them are not investment savvy. They noted that the platform could also be used to curb the increasing wave of unclaimed dividend, which retail investors are mainly affected.

 

 

Current state/expectations

The Securities and Exchange Commission (SEC) had expressed optimism that Collective Investment Scheme (CIS) in the capital market would hit N1.5 trillion before the end of the year.

 

 

Ms. Mary Uduk, acting Director-General SEC, who stated this recently at a forum in Lagos, said the commission was setting up more strategies to develop the mutual fund segment in the Nigerian capital market.

 

 

Uduk noted that the segment, which currently stands at N1.2 trillion, was growing and urged retail investors to use the funds as a means to access the market.

 

 

“In any advanced market, the Collective Investment Scheme form a very big part of the market.

“We at the commission have discovered that some of the investors who lost their savings during the crisis in 2008 are low on confidence.

“That is the reason why we are encouraging retail investors to go through these mutual funds because they are set up and approved by capital market operators and the SEC and the SEC regulates them (operators).

“Currently the size of the segment stands at N1 trillion but we expect it to grow much higher.

 

 

“So we are urging retail investors and high networth investors to use the mutual funds route to enter the market,” Uduk said.

 

 

Corroborating her, Divisional Head, Economic, Research and Policy Management, SEC,  Dr Afolabi Olowookere, noted that the commission expected to see a significant rise of N1.5 trillion or N2 trillion in mutual funds.

Olowookere noted that about 480,000 investors had keyed into that investment segment.

 

 

“We still expect that size to get to N1.5 or N2 trillion and the reason is because it provides an avenue for retail investors to buy.

“The mutual fund may not have very high return but definitely it won’t have low return and with the SEC at the forefront of financial inclusion, we are pushing the collective investment scheme because it brings some form of stability for investments.

 

 

“The number of units of account in that segment currently stands at 480,000 investors and it would likely increase,” he said.

 

 

Why need for mutual funds

Some market operators in the Nigerian capital market have described investment in mutual fund as a good investing strategy that is giving investors greater access to professional fund management.

 

According to Managing Director, Crane Securities Limited, Mr. Mike Eze,  “investors that do not have in-depth knowledge of the capital market nor the time and expertise to analyse and invest in stocks and bonds, mutual funds offer various benefits which include affordable access to expensive stocks, risk diversification; mutual funds invest in a basket of asset.”

 

 

Eze, who noted that except the investing public begin to access the stock market through investment professional, said equities would continue to record loss in value, thereby hindering the growth of the securities market.

 

 

He said investing in mutual fund would give investors the opportunity for professional fund management by managers charged with the responsibility of providing them with in-depth research inputs from investment analysts.

 

 

Eze said the fund enabled retail investors to invest in various instruments such that if one is failing, the other holds fit, so instead of putting all the eggs in one basket, it is now spread across many instruments that may not fall at the same time.

 

 

“The whole idea is to pull together the resources of small investors and be able to make a pool that would afford such an investor the opportunity to invest in choice instruments. It is about creating a portfolio, a meek portfolio,” he said.

 

 

Also, the Managing Director, Highcap Securities Limited, Mr. David Adonri, said mutual funds enabled investors, who have shallow knowledge of investment, to invest wisely.

Aside investing wisely, he said investors, who don’t have enough resources, could also invest in certain shares of their choice through the mutual fund instrument.

 

 

“For instance, the question of funds required to invest in certain area may be beyond what an investor can provide at any point in time and such investor can still invest in that area through a mutual fund.

 

 

“Funds are important financial mechanism that investors can benefit and because funds can be very large in terms of financial returns. They are also important in every economy in being able to supply funds massively to some sectors that the funds can invest in,” he said.

 

 

He noted that most foreign investors in Nigerian stock market were managers of mutual funds, “as mutual fund investors can invest in both stocks and bonds.

 

 

“If for instance there is a mutual fund that is a growth fund, that growth fund will identify stocks in the capital market that are ‘growth’ companies, again retail investors who do not have enough funds to invest in certain capital intensive investment can still benefit in those investments, by going through mutual funds,” he added.

 

 

Analysts seek market makers

 

 

The management of the Nigerian Stock Exchange (NSE) had been called upon to assist the development of the mutual funds in the nation’s capital market by introducing market makers for it as well as liberalising its entire processes

 

The Managing Director of APT Securities and Funds Limited, Mallam Garba Kasimu Kurfi, who gave the advice in a report, said there was a great potential for mutual funds in the Nigerian capital market, but that there is the need for it to be assisted.

He said: “For the mutual fund if you look at it, before the end of last year, we had hit one trillion compared to our market capitalisation of around N12 trillion. That means we’ve reached 8 per cent, this is a stage that we’ve never envisaged.

“More funds are coming and what I want the exchange to do is to ensure these mutual funds have market makers so that the buyers at any given time they want to exit, they can exit.  Once they make it like equities, I can tell you there would be more activities because the investors are wiser now.

 

 

“They want to be sure they are guaranteed and don’t forget in this mutual funds, some are dollar form so they can hedge against the inflation, hedge against the devaluation and why would you invest your money and get it in the dollar form than in the mutual funds?

 

 

“So, the mutual funds are coming and they are coming with different products at different rates. I believe the Exchange needs to ensure that there is more trading activities in the market by liberalizing the mutual funds markets so that anywhere you can buy and sell not necessarily that you have to deal with the issuer.

 

 

“What hinders mutual fund is that if a mutual fund is issued by a particular house, you would have to deal with that house if you want to buy or sell. We want the Exchange to make it open so that you can work into the market buy and sell just as people are now buying Federal Government Savings Bond and Sukuk through the equities market and they can sell through the equity market. So, if this applies to the mutual funds, we will see more activities in that sector.”

Last line

Mutual funds are important financial mechanisms that investors can benefit from  because the funds can be very large in terms of financial returns. They are also important in every economy in being able to supply funds massively to some sectors.

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