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.
Not sure I agree that little drops make an ocean but they can certainly fill up a large bucket pretty fast :) Indeed on my main account @terganftp I started with nothing and tiny drops over time have made enough to be measurable now. On my @terganmarket account I'm taking tiny "drips" of pennies a week and trying to document how they make something valuable over time.
As far as mutual funds go its awesome that you can start for as low as 5000 Naira. In Canada the bar is considerably higher.
I am curious though... You didn't mention REIT's (real estate investment trusts), Preferred Shares, or ETF's (Exchange traded funds).
I typically tell people who ask to start with a mutual fund because you get a bank advisor and low buy in amount. However, I also tell them to read prospectus and learn what the bank is recommending for them. Once they learn more switch from Mutual Funds to ETF's so they get the same diversification with lower fees. Would that also hold true in Nigeria?
And finally as a side note: Ever thought of making a fun project of taking the minimum mutual fund investment (5000 Naira), invest that amount monthly, then post how things grow over time? I'd love to see those "drops" compound. I'll be doing something similar in the "Great Little Dragons" community (although that community is currently under construction ... not currently ready for full launch :D )
I love the fun project and will definitely do that. Will do same with stocks.
We have few REITs and ETFs
Great to hear you are interested. Let me know what the minimum amount to make a demonstration amount and I'll see if I can send you that in HBD so we can make this happen :)
The minimum amount is 5,000 naira which is around 3.5USDT
I sent 5 HBD so you have a seed to get things started if you want to go ahead. If you don't, well, sad but no strings attached.
If you don't mind hearing me out I'll give my thoughts on what I'd love to see.
As you mentioned its the little drips that eventually fill the bucket (or the ocean I believe you said). I see many people on HIVE (especially Nigerians) who use it s a source of supplemental income. I'm glad they get the income to help out but I keep thinking....
...... If you took the money you earn here then diversify into an investment portfolio... and reinvest the dividends from that portfolio back into both FIAT and HIVE investments... In time you would be a good supporter of HIVE and have a good income stream in FIAT
$5 HBD is a realistic weekly income for any persistent and competent HIVE writer (once they make connections). If we could show how $5/week invested into mutual funds grows and then take a small portion of the growth / dividends from FIAT to reinvest back into HIVE that would be an awesome project.
If you are interested in posting weekly, I'd be interested in funding things.
But for now I just sent the $5 HBD as a "hear me out" and whether you decide to move forward or not? As I said, no strings attached.
I received the 5 HBD. It is a good initiative and I am onboard.
I will make a weekly post on the investment returns and all.
One other thing I will do is take the liquid HBDs I make on posts and invest. It is better than it lying fallow there.