Everything about investing in equity funds in simple English? We’ve got you covered. This mutual fund investment guide includes the following:
- The basics of mutual funds
- Types of mutual funds
- Unbundling equity mutual funds
- How to pick the right equity mutual fund
- Investing in equity mutual funds vs investing in stocks
- How to buy (invest in) equity mutual funds in Nigeria
Let’s Start With the Basics: What is a Mutual Fund?
In simple terms, a mutual fund is an arrangement that combines money from multiple people to make a massive investment. Then, people earn based on how much they contribute to this investment. Let’s break things down; using a group meal? Great, we’ll do just that.
Now, imagine you want to have a meal with a complicated recipe, and of course, an expensive price tag. To ensure you do not miss out, even though your wallet isn’t in agreement, you reach out to a couple of friends. Together, you pool funds to get a chef to cook you up the meal. That way, everyone gets a portion according to their financial contributions — no hassle.
Comparing that scenario to a mutual fund, we can describe the chef as a fund manager, and the recipe as the mutual fund. The picture is pretty clear, right? Perfect. If you still have some issues grasping this, you can check out our full guide on how mutual funds work, here.
Types of Mutual Funds
If we get into this fully, we might end up with a complex guide — and we want to avoid that. We thought as much. Based on that, we’ll stick to six common types.
Money Market Funds
These funds invest in short-term loan agreements with trusted parties. By short, we mean less than a year. What we’re saying is, your money is lent to institutions like the Central Bank or trusted a private company like Dangote Cement. Learn more about money market funds here.
Bond funds are also known as Fixed-Income Funds. A bond is a long-term loan agreement between a lender and trusted parties — the government. Hence, a Bond Fund invests your money in such contracts. For more on Bond funds, check out this article.
As the name implies, these funds have a unique focus. For instance, a speciality fund might choose to invest only in stocks of technology firms. In summary, they are mutual funds that pick specific interests to invest in. An excellent example of a speciality fund is a Halal fund. You can read more on halal investments here.
When we speak of equities, we mean shares or stocks, but those still sound complex. So, what is a stock or share? If a building with 100 rooms represents a business, each room represents a stock. Each room represents a unit of ownership, and that’s how stocks work.
With equity funds, your money gets invested in shares purchased by your fund manager. It is critical to note that your fund manager and not you owns these shares. However, you still get to earn. Take it as them renting out the shares to you to make some money.
Now, if there was a spice scale for mutual funds, with spice standing in for risk, equity funds will almost break that scale. They are high-earning but also risky. We’ll dig deeper as we progress.
Given that equity funds are high-earning but quite risky, a balanced fund seeks to enjoy the best of both worlds. This type of funds invests in a combination of bonds and equities. Check here for more on balanced funds.
Picking stocks and analysing their performance is far from easy. An index usually tracks the returns of similar stocks to make stock picking easier. It also goes further to provide an average.
For example, we can have an index that tracks the average performance of top stocks in the banking sector. Let’s call that the First 5 Index, we can then have an index fund that invests in that and call it the First 5 Index Fund. You can learn more about them here.
Unbundling Equity Funds
As described earlier, money invested in these funds is further invested in stocks. Ordinarily, when people invest in stocks, they earn from dividends. A company pays dividends to its shareholders when it shares its profits.
In an equity fund, what you have is similar to a box of chocolate from different makers. That is, the fund manager oversees a collection of carefully selected stocks from various companies. On specific dates, the manager pays a part of dividends earned across the stocks that make up the fund.
Check out top-quality equity mutual funds here.
Interestingly, asides from dividends, there is another way to earn from equity funds — capital gains. When you sell your units in at equity fund at a higher price than you bought them, you experience capital gains.
Are you still confused? Hold on. To invest in an equity fund, you need to purchase units of that fund. If a unit costs NGN10 and you are buying 10,000 units, you have invested NGN100,000 in that fund. In a year, if that cost climbs up to NGN12 and you sell your units, there’ll be a gain of NGN20,000 (or 20%) on your capital. Not so hard.
You earn from equity funds through dividends and capital gains.
How to pick the right equity mutual fund
For a start, what matters is your objective and how long you want to invest for. Ideally, equity funds are significant for long-term investment goals. If you are in search of a source of regular income payments, you should consider bond and money market funds.
If the nature of an equity fund fits your objective, you can peruse the prospectus for the following:
- Fund performance
- Management fees
- Investment Pattern
A fund’s prospectus is a guide to everything you need to know about a fund. You can call it the fund’s manual.
1. Fund Performance
If you were to hire someone to work for you, you’d pay attention to how they’ve performed in the past. Even though this doesn’t serve as a guarantee for future success, it serves as a useful guide. The same applies to mutual funds, pay attention to performance in the past years.
Check out the performance of top equity funds here
2. Management Fees
For professional work that chefs do, they add their fees to the meal cost. Remember, your fund manager is similar to a chef — they cook up beautiful investment recipes. To compensate for their beautiful work, you pay a management fee.
3. Investment Pattern
To be comfortable with an equity fund, you might want to find out what the fund manager invests in. Accessing this information is pretty easy once you have the prospectus of that fund. With the Cowrywise app, you can obtain the prospectuses of top equity funds in Nigeria.
Investing in Equity Funds vs Investing in Stocks
A common question people ask is, “Why should I choose equity funds over investing in stocks directly”? Great question. Given that equity funds also invest in stocks, are there any beneficial differences? Yes. We’ve got a superstar list.
1. Lower Risks
A fund is made up of various stocks and not just one stock. That way, if some stocks underperform the others can cover for them. On the other hand, if you hold on to one stock and it underperforms you get to experience a massive loss.
Also, the story is the same as when some stocks gain — the overall impact is not as significant as owning that stock directly. Although, over time equity funds tend to perform better overall.
2. Lower Fees
When you invest in stocks, you pay the broker every time you buy and sell — and pay more when you reach out for help to make the best of your investments. A broker is a middle person, approved by the regulator, to help purchase stocks on your behalf.
For equity funds, you pay a fixed little percentage from the gains you make. On Cowrywise, the management fees are clearly stated to guide your investment choices.
3. Less Stress
Can you imagine yourself sitting to read through the financial statements of various companies? Equity funds take away that burden. The fund managers research on your behalf. All you need do is let your money work for you.
4. Better Access
Several times there are chances that you might not be able to purchase a stock that you love for the following reasons:
- They are unavailable.
- The minimum purchase requirement is quite expensive. Ex: Investors must purchase 1 million units at NGN10 each.
Thankfully, fund managers are usually ahead of the game when it comes to this. Also, they make it possible for you to invest with as little as possible. For instance, you can invest in mutual funds using Cowrywise with as low as NGN100.
How to buy (invest in) equity mutual funds in Nigeria
The usual way to go about this is to search for fund managers, make choices, and go on to make deposits. The process isn’t that smooth, though. Here’s what it looks like:
John visits the sites of different fund managers to compare their offerings. Multiple tabs — who else does that? We understand.
While reviewing the funds, he has to download the prospectus for each fund — wasting precious storage space and data.
Finally, when he makes a choice, he most likely needs to send emails to the fund manager when he makes a deposit.
At Cowrywise, we’ve made the process of investing your money seamless. You can compare multiple funds in one space. You don’t need to send email notifications whenever you make a deposit. In summary, we help you invest in equity funds — no long forms just a few clicks.
Start investing here.