By Babajide Komolafe

As discussed earlier, there are different types of mutual funds. Among the most popular is the Unit Trust scheme, widely patronised by small investors due to its low entry requirement. Minimum investment ranges between N5,000 and N100,000.

Unit Trusts are so named because the total fund is divided into equal units of monetary value. For example, if one unit equals N1.00, an investor with N100 will get 100 units.
There are two main types of Unit Trusts:
Open-Ended Scheme: Continuously creates and redeems units after the initial public offering. Prices are determined by the Net Asset Value, NAV, — total assets minus liabilities at the time of purchase or redemption.

Closed-Ended Scheme: Issues no additional units after the initial offer. The fund is listed on the Stock Exchange, and prices are driven by market forces of demand and supply. Unit holders must redeem their holdings through stockbrokers.

Before investing in a mutual fund, it is essential to understand its investment focus. Different funds focus on different asset classes.
A money market mutual fund invests primarily in short-term, interest-earning instruments such as bank placements, treasury bills, and commercial papers.

These instruments usually mature in less than a year. The main objective of such funds is capital preservation with steady income.

Also the minimum initial investment is N5,000 and subsequent investment of N1,000 and above.

Hence, it is suitable for people with low income and other categories of retail investors.
Because money market funds are based on interest-earning instruments, the risk of capital loss is very low. However, returns depend heavily on prevailing interest rates in the economy. When interest rates are high, returns are also high, and when they fall, returns decline correspondingly.

For instance, with the Central Bank of Nigeria’s, CBN, benchmark interest rate above 25% since last year, many money market mutual funds returned above 20% in the first half of this year. One investor who committed N10 million in August last year, earned N2.226 million as returns by August this year, equivalent to 22.3%.

However, with inflation slowing and the CBN recently cutting its benchmark rate to 27% from 27.5%, interest rates are expected to decline gradually. Even so, most money market funds are projected to deliver returns above 17% in the coming year.

This remains far more rewarding than leaving money idle in a savings account.