Trading session at NSE
Goddy Egene writes on the need for investors to play the stock market through collective investment schemes and enjoy many benefits
Four years after the downturn in the Nigerian capital market began, the recovery has been very slow. By the close of trading last Monday, the market has recorded a year-to-date (YTD) growth of a little over two per cent. Although the YTD was higher last May, the volatility slashed the growth to its present level.
However, while the YTD growth is just above two per cent, some individual stocks have outperformed the Nigerian Stock Exchange (NSE), which is the major gauge of the YTD performance.
For instance, Presco Plc has so far recorded a capital gain of over 60 per cent, United Bank for Africa Plc (46 per cent), Cadbury Nigeria Plc ( 28 per cent) among others.
Despite these positive performances, many investors are yet to return to the stock market. Investigations have revealed that one of the factors responsible for the sluggish recovery being witnessed in the market is the low confidence among domestic investors, following the losses many of them suffered. The lack of attention by domestic investors has left the market in the hands of offshore investors who enter and exit at will, hence the high volatility in the market.
A stockbroker and Managing Director of Crane Securities Limited, Mr. Mike Ezeh, said domestic investors should begin to take advantage of the low prices and enter the market instead of continuously staying away from the market due to past ugly experience.
He explained that if investors were afraid of losing money or did not know the stocks to buy, one of the best way to play the market was mutual funds, otherwise known as collective Investment Schemes(CIS).
According to him, there are over registered mutual funds but their patronage was low due to some factors.
While investors rarely patronise CIS in Nigeria, participation in some other financial markets is higher through mutual funds rather than by direct investment in equities.
For instance, in Brazil, 10 million more investors participate in the market through mutual funds, while only 500,000 invest directly in the market.
The President, Association of Corporate Trustees(ACT), Mrs. Oluwatoyin Sanni, said investors should take advantage of the depression in stock prices to buy units of well-managed mutual funds in order to benefit from the capital appreciation over time.
ACT role in mutual funds is to ensure that investors’ funds are preserved. And according to Sanni, “the mutual funds are preferred option to enter the equity market because they are regulated and structured for investor protection with independent monitoring compliance, and custodians ensuring safe keeping of the assets.”
She added that money market and bond funds were also giving excellent returns at this time and suitable for investors with low risk appetite and higher liquidity requirements.
CIS pools money from different investors that have a common investment objective. It is a form of investment that is accessible to all and it is managed by fund managers, who are professionals in fund and portfolio management.
Each investor has a proportional stake in the CIS portfolio based on how much money they have invested or retained in the pool of funds. The fund manager invests the money by buying treasury bills, stocks, bonds, or other securities according to specific investment objectives that have been established for the scheme. In return for putting money into these funds, the investor receives shares or units that represent their pro-rata share of the pool of fund assets.
CIS can take different forms. These include: Money market funds, fixed income funds, equity funds among others. Money market funds, for instance, invest in short-term (less than one year to maturity) corporate and government debt securities such as treasury bills, guaranteed commercial papers, bankers’ acceptance, certificate of deposits. Fixed income funds on the other hand invest in debt securities like bonds, debentures or corporate preferred shares that pay regular dividends. Funds, as the name implies, invests primarily in equities of local companies. The goal is typically long-term growth through capital appreciation of the asset held.
A balanced fund is a mixture of that in that it invests in ‘balanced' portfolio of equities, long-term debt securities and money market instruments with objectives of providing reasonable returns.
Explaining how CIS works, Ezeh said by pooling funds of several individual and corporate investors, it gives investors access to investments that they will ordinarily not have access to.
“Unlike equities, a CIS is generally not traded on a Stock Exchange but investors buy and sell units to/from the fund manager at any time. Shares are created and sold to new investors on a continuous basis so you can either invest a lump sum or on a regular monthly basis,” he said.
According to him, the operation of the entity is based on the principle of the diversification of risk.
“Payment is easy and convenient and can be done online or by direct debit. Also dividend proceeds can be credited to an investor’s bank account,” he said.
The Benefits of CIS
Speaking on the advantages of mutual funds, the Chief Responsibility Officer of Value Investing Limited, Mr. Seye Adetunmbi, said investors would benefit from the expertise of professional fund managers.
“Funds are managed by highly qualified and experienced investment managers. Also, the fund allows retail investors to buy financial instruments that would normally be out of their financial reach if their funds had not been pooled together. The average CIS portfolio returns compare favourably with returns from other traditional investment products,” he said.
He added that CIS were a flexible form of investment because it gives investors the opportunity to either invest a lump sum or a regular investment each month. Also, distributions of dividends to unit holders are not subject to withholding tax.
Adetunmbi noted: “By investing in a range of underlying assets, risk is spread amongst many assets. Besides, CIS offers liquidity, meaning that the unit holder may choose to cash in a portion of the CIS or all of it. In other words, your money is always accessible. The funds are held in a trust which is separate from other company assets. Income is earned on any distribution of interest or dividend earned by the fund and also on any net increase in the net asset value per share of the fund share.”