By Babajide Komolafe
In the previous four editions we discussed how to invest in treasury bills and commercial papers. In subsequent editions we would discuss how to invest in mutual funds and criteria for determining which of the options you should choose to invest your money.
Mutual funds are also referred to as collective investment schemes.
There are different types of Mutual Funds, MF, and they include: Unit Trust schemes, Venture capital and Real Estate Investment Schemes, REITS.
A mutual fund is an arrangement in which several investors pool their money, and a professional manager invests it in various assets such as treasury bills, stocks, bonds, and commercial paper, with the aim of generating returns (profits) for the investors over time.
There are six major parties to a mutual fund: the Trustees, the Asset Management Company, AMC, the Fund Manager, the Custodian, and the Securities and Exchange Commission.
A mutual fund is created by the Trustees in collaboration with the AMC.
The Trustees are the organisation that holds the property and assets of the mutual fund in trust for the people that invest their money in the fund. The role of the Trustee is to safeguard the interest of the investor by ensuring that the fund is invested in the best interest of the investor and in accordance with regulations, objectives and strategy of the fund.
The AMC is the fund manager and it does this by employing staff, who are certified professional fund managers to manage the fund. The Fund manager(s) make decisions on what, where, how, and when the money or fund is invested.
The Custodian, usually a bank, is the organization that holds the assets (money) of the fund. In this arrangement, the fund is treated as a customer of the financial institution, with an account in which all the fund’s money is domiciled.
It is important to stress that the Trustees, Asset Management Company, AMC, and the Fund Manager are regulated by the SEC, which provides the laws and guidelines for the creation and operation of mutual funds. The Custodians are licensed and regulated by the Central Bank of Nigeria, CBN.
So, before anyone or organisation can create and operate a mutual fund legally in Nigeria, that person or entity must be licensed by the SEC, the mutual fund must be approved by SEC and the Custodian must be licensed and regulated by the CBN.
Thus, mutual funds are guaranteed by the SEC and CBN as safe investment options for the public. The above also implies that before you agree to invest in any mutual fund, visit the SEC website to verify if that fund and the organisations behind it are licensed by SEC.