By Babajide Komolafe
“I have investment in shares and do receive dividends from the companies which I use to buy more shares. But I would like to know what I can do with the dividend, to make more money instead of just reinvesting in shares.”
In the first part of this topic, I explained that the first strategy to making more money from the returns earned on your investment is to diversify. Don’t put the returns in the same type of investment as the original savings. And I explained that this means you put your return in a less risky and more liquid type of investment.
This reduces the risk of losing the money invested and returns earned from it.
The reader who made the request above invested in shares, the most advisable way to make more money from the dividend (returns), is to invest them in a mutual fund, especially a fixed income mutual fund. This could be a money market mutual fund, bond mutual fund, or dollar mutual fund.
Investment in shares is more risky compared to investment in fixed income mutual funds.
In the case of investment in shares, the investor could lose money in case of reduction in share price. This risk of losing money is very minimal or even zero when it comes to investment in fixed income mutual funds. This is because fixed income mutual funds are invested in interest yielding instruments like treasury bills, bonds, commercial papers, etc. It is guaranteed that the principal invested would always be repaid.
The only thing that could change is the interest rate on the instrument which is determined by the general level of interest rate in the country. When the interest rate is high, the income or returns from fixed income mutual funds will be high and vice versa.
When it comes to selecting which of the fixed income mutual funds to invest in, a money market mutual fund is most advisable. The investment focus of a money market mutual fund is treasury bills, bank deposit, commercial paper, which are short term, interest rate based instruments. Due to the current high interest rate regime, the year-to-date, YTD, return on most money market mutual funds ranges from 19 percent to 21 percent. In addition to this, the entry level for a money market mutual fund is N5,000, and subsequent investment is N1,000, which makes it easy to invest small amounts of money over time. That is why money market mutual funds have the highest level of patronage when compared to other types of mutual funds.