• Monday, May 20, 2024
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Mutual funds good option for first time investors


If you coming into investment for the first time and do not know the intricacies of the investment market, mutual funds are safest options for you. Not only will it guarantee you returns to become stable in your finance, it is safer because you will rely on the technical expertise of the fund managers.

Miriam Caldwell, a personal finance specialist says you can take advantage of mutual funds that have low initial investment options because it makes it easier for first time investors.

Additionally, she says some mutual funds allow you to set up a monthly automatic draft to help you avoid the high initial investment. You should carefully consider the operating costs and the average annual return over time. Remember that the funds will go through high and low times, and that you need to ride out the low times in order to make money.

ARM, one of the leading asset management and financial advisory firms with a global perspective in investment management say a mutual fund is a unit trust made up of a pool of investors’ money, managed by a fund manager who invests that pool of money in various investment instruments. Units are initially allotted and priced to reflect the overall value of the fund.

Each investor in the fund holds units which represent a portion of the fund, and subsequent capital gains are reflected in the price of the units. A mutual fund may be open ended, which means that the fund is open to new investors at any stage of its life cycle; or closed ended; meaning only the investors who initially pooled the funds can participate.

One of the benefits of mutual funds according to ARM is that unlike other investment instruments which require a substantial amount of capital, investing in mutual funds isn’t as demanding. In Nigeria for example, with as little as N10,000 you can invest in the Discovery Fund.

Another benefit is that open-ended mutual funds are highly liquid, and you can cash in your investments anytime you want (some closed-ended funds do have an early withdrawal penalty), unlike time deposits which carry a hefty penalty for premature liquidation. Furthermore, the asset allocation of a mutual fund is usually diversified over multiple securities. As a result, an underperformance in one stock is unlikely to have a huge impact on the mutual fund. This makes mutual funds more effective, in managing risk compared to equities, and more profitable than time deposits.

Administration is an especially poignant benefit in Nigeria where investing in equities directly through the stock market attracts major administrative issues such as signature verification, verification documentation, banker’s confirmation, etc, for each individual stock you purchase. With mutual funds, you’ll receive one certificate (for every investment you make into the fund). Under the ARM’s Personal Portfolio Service, investors receive portfolio valuation reports quarterly.

A variety of mutual funds have evolved to satisfy a wide range of investor needs, each with its peculiar nature and investment strategy, says ARM. They include money market funds, equity funds, balanced funds, global/international funds, specialty funds and index funds.