Investors urged to hedge depreciation risks with money market, dollar mutual funds

Comercio Partners, an investment banking firm has advised investors to allocate a significant portion of their portfolio to money market and dollar-based mutual funds to benefit from the interest rate hike by the Central Bank of Nigeria, CBN, as well as the risk of further depreciation of the naira.

Co-Managing Partner/Founder, Comercio Partners, Nnamdi Nwizu, gave this advice in the Comercio Investors’ Education Series report.

The report, among other things, explained the meaning and types of mutual funds, even as it differentiates mutual funds from other types of investments such as equity, fixed income and bonds.

“Mutual Funds are “structured”, they are “tailor-made” to meet the desire and taste of the pool of investors in the fund. Because they are structured, they can be designed to satisfy various investor needs. Mutual funds can be structured either as an Equity, Debt or a Hybrid Fund”, the company explained.

The major types, it explained further, are Equity Funds, Debt Funds, Hybrid Funds, Money Market Funds, adding that other types include Income funds, Tax-saving funds, Capital protection funds and Pension funds.

“Mutual funds can also be classified based on risks such as Low risk, medium risk and High-risk funds, Emerging market funds, Global funds, Foreign or International Funds”, Comercio Partners added.

While noting that mutual funds in Nigeria recorded 11.02 per cent increase in Net Asset Value, NAV to N1.388 trillion year-to-date in June 2022 from N1.250 trillion in the corresponding period of June 2021, Comercio Partners however noted that money market mutual funds dominate, accounting for 41.93 percent of the total NAV of the entire market, growing to N582.296 billion as at June 2022 from N477.494 billion in the corresponding period of 2021.

Nnamdi Nwizu explained the dynamics behind the growth in mutual funds and implications for investors, saying: “Investment in Mutual funds will continue to see more traction for the remaining part of the year, while we anticipate investment in Dollar funds given the recent devaluation of the Naira to the dollar both in the official and parallel market.

Given the current level of inflation, high-interest rate, and low return on savings in traditional deposit banks, Nigerian savers are now making the long-term transition from building savings with banks to a culture of saving with mutual funds, leading to growth in the industry.

“The consistent hawkish stance from policymakers in the near term would pave the way for significant industry expansion as investors seek to maximize returns on their investment.”

Asset Management Active Management Portfolio, CPAM, Nwizu, advised investors to, “allocate a significant portion of their portfolio to dollar funds to serve as a hedge against the devaluation of their wealth and to benefit from stable returns on investments.

“On the domestic front, investment in money market funds will be advisable in the near term given the current economic and political state of the country”, the firm added.