When most people hear the words investment or investing their minds often relate it to the stock market, real estate, or even crypto depending on the generation you are speaking to. But one of the most beginner-friendly and diversified risk ways to grow wealth is often overlooked. This is mutual funds.
What Is a Mutual Fund?
A mutual fund is a basket of investments. Instead of buying one stock, you join many other investors in pooling money together. This pooled money is managed by a professional fund manager, who invests it in a diversified portfolio of stocks, bonds, or other securities. In return, you receive units in the fund, which represent your portion of the overall basket.
It is just like instead of buying one apple with your money, you buy a portion of apple, orange, lemon, banana, pawpaw, and other fruits with the same money. That way if one fruit spoils, the others won’t and give you value.
How it Works?
Your investment value is calculated daily through something called the Net Asset Value (NAV) which is the price per unit of the fund. When the companies or bonds inside the fund perform well, the NAV and your investment value increases. If they perform poorly, the NAV decreases.
Types of Mutual Funds
- Equity Funds – Invest in stocks. It is usually high risk with likely higher rewards.
- Fixed Income Funds – Invest in government bonds or top corporate bonds.
- Balanced Funds – It is a mix of stocks and bonds for moderate risk.
- Money Market Funds – Low risk, short-term investments with modest returns.
- Index Funds – It tracks a market index, like FUGAZ and S&P 500.
- Halal Funds – Invest in Shariah compliant fixed income securities
- Dollar Funds – Invest in high quality Eurobonds and short-term USD deposits. It is usually common in countries with other currencies.
Why Mutual Funds?
- Diversification: It reduces your risk by spreading investments across many assets.
- Professional Management: Professional fund managers make decisions on your behalf and manage the portfolio.
- Conveniency: You can access wide range of securities with a single investment.
- Accessibility: You don’t need huge capital to start. You can buy mutual funds with as low as 5,000 naira in Nigeria which is less than 4dollar.
- Liquidity: Easy to buy or sell units when you need cash.
The Risks
While mutual funds offer an easy way to invest in multiple assets, they have their own risks. The profitability of your portfolio is still tied to market performance and bonds rates. You also pay management fees and VAT that reduces your net earnings.
Most fund managers have a dashboard that shows past funds’ yield and the investment risk level. This is to make you informed. They also put a disclaimer such as Past performance is not a guarantee of future performance.
Opinion
Mutual funds potential is huge when fully maximized and compounded. Nigeria money market fund which is a low-risk investment currently offers 19% annual return which can turn to something huge if you deposit monthly.
Little drops make an ocean, and you can start now.