By Bookie Ikeotuonye

Who remembers the topic ‘Collective Nouns’ in English Language? A herd of cattle, a posy of flowers, a gaggle of geese, a swarm of bees, a pride of lions (my personal favourite), e.t.c. At the time, we did not realize the underlying lesson being taught– thatthere is power in numbers. Each member of a Group has a role to play, a contributionthat makes up the sum-total of the collective benefits to the stakeholders therein. This is the primaryadvantage of a collection.

‘Collective Investment Schemes’, also known as ‘Mutual Funds’ is an investment scheme in which several individuals or corporates, come together to pool their money to invest in a particular asset(s) with the objective ofenjoying the returns arising from that investment in line with the stipulations of the guiding transaction document. The ‘particular assets’ in this definition is usually referred to as the underlying assets. These are simply the investment instruments on which the Mutual Fund is based. The investors are called Unitholders and the funds are managed by a Fund Manager (excuse the tautology), usually an asset management company. The agreements as to the underlying assets of any Mutual Fund can be found in the Trust Deed of the Fund. This is the said guiding document of the Investment, compliance with which is monitored by the Trustee to the Fund.

Typically, the mix of underlying assets determines the name of the Mutual Fund. It is similar to the African tribes who name their indigenes according to what part of town they are from. A Money Market fund has majority of its funds invested in Money Market instruments, i.e. near-cash assets like short-term fixed deposits, treasury bills and other instruments of less than one-year tenor which are easily convertible to cash. A Money Market Fund should provide cash returns in form of dividends every quarter to its Unitholders as this is the primary investment objective of the Fund.

An Equity Fund has majority of its funds invested in shares, (did you ‘Share the Cake’ with us in the last Edition?) which is actually shareholders’ equity.The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund’s portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund. A large amount of investment capital would be required for an individual investor to achieve a similar degree of risk reduction through diversification of a portfolio of direct stock holdings. Pooling small investors’ capital allows an equity fund to diversify effectively without burdening each investor with large capital requirements.The company’s shares in which the funds are invested in and the apportioned volume are guided by the provisions of the Trust Deed. Specific companies are not stipulated, butminimum ratings are stated as regards the allowable equity investments. There are some specialty equity funds that target certain sectors, such as health care, commodities, manufacturing, etc. These are named accordingly.

A Bond Fund as the name implies, invests a large proportion of the pool of funds in medium-long term fixed income instruments. I may need to digress a little to define a Bond investment instrument.A bond is a fixed income instrument that represents a loan made by an investor to a borrower, typically a corporate or the government. I will delve deep on the workings of a bond in the next class, but a simple definition will suffice for now.The Fund Managers purchase and sell bonds based on economic and market activity. They realistically have to trade the bonds to meet redemptions (withdrawals) of investors. For this reason, bond fund managers rarely hold bonds until maturity.Bond funds invest in many individual securities, providing diversification for a relatively small investment minimum.

A Real Estate Mutual Fundusually used interchangeably with Real Estate Investment Trust(REIT), is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies. A REIT is a corporation, trust, or association that invests directly in income-producing real estate and is traded like a stock.To ensure the payout of Unitholders, the fund holds a part of its money in financial assets that can be converted to cash fast, i.e money market instruments and bonds.Real estate funds provide dividend income and the potential for capital appreciation for medium- to long-term investors and make it possible to trade units of real properties in the stock market. REITs afford the small or retail investor the rare opportunity to invest in real estate. This is the primary benefit of investing in a REIT.

A Balanced Fund or Mixed Fund or Hybrid Fund is a mutual fund which invests in both stocks and bonds. They earn the ‘balanced’ moniker by keeping the balance between the various asset classes quite steady, usually placing fixed proportions of their assets in money market instruments, stocks and bonds.Balanced funds consist of both fixed income and equity securities and can be a good vehicle for investors looking for a one-stop-shop diversified investment solution. Investors who seek less volatility often choose balanced funds because they provide income from the bond allocation for a portfolio. The most prominent feature of this fund is the power it gives the retail investor to diversify investments whilst still enjoying the cocoon of the pool that is a Mutual Fund.

Mutual Funds are usually valued and measured in Units, hence the term ‘Unitholder’. We can liken each Unit of a Mutual Fund to a chromosome in a human body which is a DNA molecule that contains all the genetic material of that human being. When an investor buys a single Unit of a Mutual Fund, all the underlying assets are contained in that one unit and the said units are valued daily through the Net Asset Value (NAV) computation.The NAV factors the value of the assets as at the computation date less the liabilities of the Fund like Fund Manager’s, Trustee, Custodian and Regulatory Fees. The resulting price becomes the value of the Unitholder’s investment, depending on how many Units are being held.

When you buy a mutual fund, your money is combined with the money from other investorsand allows you to buy part of a pool of investments. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds. Not all investments perform well at the same time. Holding a variety of investments may help offset the impact of poor performers, while taking advantage of the earning potential of the rest. You may not have the skills and knowledge to manage your own investments or want to spend the time. Mutual funds allow you to pool your money with other investors and leave the specific investment decisions to a FundManager. FundManagers, though guided by the Trust Deed and Regulators, decide where to invest the money in the fund and when to buy and sell investments. You can sell your fund units or shares at almost any time if you need to get access to your money, though you may get back less than you invested if the underlying assets, are volatile like equities. Remember though, that equities when bullish, are one of the few hedges against inflation so they should form part of your investment mix.

Mutual funds can be used to meet a variety of financial goals. From a young investor with a stable income and many years to invest who feels comfortable taking more risk to achieve greater potential returns, to one approaching retirement who is less comfortable with risk and more interested in fixed income investments. Whichever demographic you fall into, do include Mutual Funds in your investment portfolio.

Case adjourned….

BukyIkeotuonye.

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