If only useful finance mumbo jumbo like mutual funds, investing, stocks, taxes and many more, were taught to everyone back in school. Today, we’re just as grown as we are lost when it comes to personal finance but all that is about to change. This article will teach us about one very crucial type of investments- Mutual Funds — the Millennial Translation; In 10 snippets
…What is even going on?? Why can’t we be kids again, only worrying about food and play???
1. What Are Mutual Funds?
Think of it this way; Your friend needs 100 Naira in total to start four different businesses. She comes to you and a bunch of other friends of yours to ask for help. She told you that the more you could afford to contribute and the longer you were willing to keep your contribution with her, the more interest she would pay you back on top of your total contribution. That’s basically Mutual Funds for you.
Properly defined, Mutual Funds is an entity(“she” above) that pools cash from a variety of investors(you and the 3 other friends) for the sole purpose of investing the cash in shares, bonds, treasury bills(the four businesses that she wants to start) etc. The profit derived from the diversified pool of investments are shared to investors in the funds annually or semi annually or as stipulated(the length of time you are willing to keep your money with her or the amount contributed) in the fund prospectus.
Are you still with me? Great! Let’s move on!
2. Who Operates A Mutual Fund?
Mutual Funds are run by professional investment firms who in turn have experts that are familiar with the money and capital markets. The difference between a Mutual Fund and a Stock brokerage is that this time, your funds manager does not require instructions from you on whether to put your money in say, option A or B. Here is a list of some Mutual Fund Managers in Nigeria to give you a better idea.
3. What Types Of Investments Do Mutual Funds Do?
Mutual Funds have a broad and diversified pool of investments(commonly called an investment portfolio). The most common types are:
- Money Markets: A Mutual Fund Manager can invest your money in Treasury Bills(T-bills), Commercial papers, etc. which are all money markets. In serious terms, they are basically debt notes that are issued on the promise of payback of the principal plus a stipulated interest rate at a predetermined date.
- Capital Markets: A Mutual Fund Manager can also choose to invest your money in stocks and bonds that are traded daily. For example, when they invest in shares, they hope that the value will appreciate and thus increase the value of their fund or make them a nice profit when they sell the shares. Capital markets are typically more long term than Money Markets.
You must also note that your mutual funds manager will let you know what type of investments they plan to put your money in, in your prospectus.
We’ll stop here for now. In part 2 which comes out on Friday, we’ll talk about categories of investments that Mutual Funds invest in, why you should care to invest in them, how much to invest, profits, risks and the best options for you.
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