Mutual Funds Can Create Wealth and Fund Critical Infrastructure

Monday, December 03, 2018 /10:20 AM /FSDH Research

FSDHResearch’s analysis shows that mutual fund investment can create wealth forinvestors and that funds pooled together can be used to finance criticalinfrastructure and expand business operations.

Investorsin mutual funds do not necessarily need to have expert knowledge aboutinvestment management to enable them to create wealth, as there are investmentmanagement experts whose primary role is to grow the value of investments undertheir management.

Moneythat is pooled together through mutual funds can be channelled to addresscritical infrastructure either directly or indirectly. This would promote thecompetitiveness of the economy, enabling businesses to expand operations andemploy more people, and would assist government at all levels in generatingmore tax revenue. FSDH Research warns, however, that mutual funds need moresupport than is currently available to enable potential investors to fulfiltheir wealth creation and developmental roles.

Amutual fund is a pool of funds brought together by a professional fund managerfrom several investors to invest in selected underlying securities. Theunderlying securities can be one or a combination of the following: stocks,fixed income securities, real estate, and commodities. A mutual fund portfoliois structured and maintained to match different investment objectives. The typeof mutual fund an individual invests in depends on their financial objectivesand appetite for risk. Most mutual funds are open-ended investment schemes.

Thismeans that the fund manager can create additional units for new investors ondemand. The fund manager is also able to provide active liquidity by redeemingunits from existing investors who want to sell units for cash. Through thispool of funds, an investor creates wealth over a long period of time by makingthe money work for him through regular saving and investment.

Inaddition to liquidity, mutual funds offer a range of benefits to investorsincluding portfolio diversification and lower transaction costs. The existenceof a Trustee and Custodian to a mutual fund ensures the safety of investments,as the Trustee ensures that the fund is managed in line with approvedinvestment guidelines, and the Custodian holds the fund assets. Mutual fundinvestments are affordable for low-income investors, as some funds require aninitial investment of only N5,000.

Themutual fund assets in Nigeria have grown significantly in the last five years.This is an indication of the growing interest in this class of investment. Datafrom the Securities and Exchange Commission (SEC) on the Net Asset Value (NAV)of all registered mutual funds in Nigeria shows that the collective NAV grew by349% between 01 November 2013 and 02 November 2018.

Thistranslates to a Compound Annual Growth Rate (CAGR) of 35% between the periods.Despite the impressive growth rate, FSDH Research notes that there issignificant room for growth in mutual fund assets as we estimate the ratio ofmutual funds to the country’s Gross Domestic Product (GDP) at 0.51%.Governments and corporates may access the required long-term funds to financecritical infrastructure and business expansion through the growth of mutualfunds.

Withappropriate structures in place, mutual funds can also be used to revive thereal estate sector, which is currently in depression. As fund managers mobilisefunds and invest in Bond Funds, Real Estate Funds and Equity Funds, they areproviding long-term capital for developmental purposes. They also provideshort-term working capital through investment in Money Market Funds. The growthin investable funds has positive multiplier effects on the economy.

However,FSDH Research’s findings show that Government, regulators and the operators ininvestment management need to give the mutual fund additional support.Government could offer tax incentives to investors who are committed to aregular investment plan in mutual funds. It should also create an enablingenvironment that will lead to job creation in the country in order to increasesavings and investable funds.

Regulatorscould promote innovative legislation to increase investment in mutual funds andexpand investment channels to increase returns on the funds invested. The FundManagers Association of Nigeria (FMAN) should continue to create publicawareness on the benefits of mutual funds in order to generate interest fromthe investing public.

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