Adopting a collective investment scheme (CIS) is the best way for the unenlightened investor to explore wealth creation in the equities market.
In CIS, licensed and regulated by the Securities and Exchange Commission (SEC), participants pool contributions to share profit from the management of their money by a third party.
Individuals pool resources which are managed by a fund manager who uses his expertise and professional knowledge to invest the money in investible instruments (shares, bonds, treasury bills, et cetera) to make profit for the contributors.
At the end of the year, the fund manager, who must be registered under the Investments and Securities Act (ISA), is paid out of the profit and the remainder (or part) is shared to the contributors as dividend or profit.
ISA, which governs investment in the capital market, defines the scope and mode of operation of CIS.
CIS became more attractive after retail investors with little or no technical knowledge of the market lost substantial funds in the 2008 crash.
About 40 per cent of Americans invest in mutual funds to date.
But in Nigeria, investor apathy has dominated the capital market since the crash. Foreign investors take advantage of low equities prices to make huge profits in dividends and capital appreciation.
With the advantage of CIS, ordinary investors are more likely to make profit and minimise risks of losses. Each contributor can benefit from returns on many instruments across different sectors and suffer minimal loss if one instrument does not perform well.
There are all manner of CISs out there. Some are not licensed by the SEC. Some are established to defraud or engage in other illegal activities.
Before you patronise any CIS visit the website of the SEC to ascertain if it is licensed.
They are categorised into Unit Trusts, Venture Capital Funds, and Real Estate Investment Schemes. Each has unique attributes and offers opportunities for diversification of investment portfolios otherwise out of reach.
Local retail investors should explore CIS for wealth creation, given its attractive returns.
Arunma Oteh
SEC Director General, Arunma Oteh, reiterated at a Capital Market Committee (CMC) meeting in Lagos that there are several benefits of CIS, one of which is that an investor gets expert advice.
CIS also allows investors to diversify risks and learn more about market dynamics and how to respond to them to guarantee the security of investment.
Oteh added: “First and foremost you get the benefits of people who are experts. If you are doing your day job, you can take advantage of the knowledge of somebody else.
“If I have N10,000 and I invest in a mutual fund that invests in banks, I have the opportunity of investing in several banks rather than being exposed to what happens to one bank. It allows you to diversify your risks.”
She said she is “very excited” that the Fund Managers Association of Nigeria (FMAN) has a scheme, likewise the Capital Market Literacy Committee (CMLM), to educate people on the capital market, in order to have more Nigerians participate in mutual funds.