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The balanced fund: lower risk, steady returns

By United Capital
02 November 2016   |   8:37 am
The current state of the Nigerian economy makes it rather risky for some investors to invest their hard earned money in a number of asset classes. Poor returns on the Nigerian Stock Exchange, lower real estate values, high inflationary trends are all limiting the number of asset classes that provide steady returns and capital growth…

The current state of the Nigerian economy makes it rather risky for some investors to invest their hard earned money in a number of asset classes. Poor returns on the Nigerian Stock Exchange, lower real estate values, high inflationary trends are all limiting the number of asset classes that provide steady returns and capital growth for investors.

Fortunately, investors can rely on the services of the Balanced Fund to invest their free cash flow at a much lower risk with steady returns.

A Balanced Fund, as the name implies, is a weighted combination of investments in two or more asset classes that reward investors with higher returns and lower risk. For example, a Balanced Fund can involve an investment in riskier equity funds and relatively safer fixed income securities at a fairly low cost to investors.

Features of the Balanced Fund
Through a Balanced Fund, an investor can be assured of the opportunity to increase the value of their investment via capital appreciation as well as guarantee a steady income stream via interest earnings and dividends.

A particular advantage of the Balanced Fund is their potential to provide a hedge against inflation as fixed income securities are typically priced above the average inflation rate. The bond component of the Balanced Fund provides an income stream which serves as an incentive for investors who desire to be able to sweat that money in return for guaranteed incomes.

A Balanced Fund provides added benefits apart from the ones enumerated above. For instance, by investing in a Balanced Fund, the investor is spared the headache of security selection, asset allocation and risk management as fund managers shoulder this for them. A Balanced Fund subscription can also be used as a collateral for obtaining loans from commercial banks in Nigeria.

Who can invest in a Balanced Fund?
A Balanced Fund is usually the premium choice for investors who seek a mixture of steady income stream and capital appreciation. It also often recommended to passive investors, who have free cash flow, are risk averse and are looking to diversify their portfolio. This fund is also well suited for investors who are looking to earn a steady stream of income either as a retiree or those looking to save unto a future cause. They are well suited for cooperatives and investment clubs who seek to invest in asset classes with steady returns that are negatively correlated.

Balanced Fund options in Nigeria
Nigerian fund managers have sought to deliver to investors the above benefits of balanced funds, through a combination of carefully weighted investments equities and debt instruments. Nigeria currently boasts approximately 14 Balanced Funds with a Net Asset Value (NAV) of N24.96 billion as at 30th September 2016, according to information from the Nigerian Securities and Exchange Commission (SEC).

The Balanced Fund, as depicted above is increasingly gaining traction as an investment product offered by professional fund managers in Nigeria. Investors have an array of quality and experienced fund managers that offer these products providing them the opportunity to select the one that suit their investment appetite.

A Balanced Fund is considered an excellent capital market risk spreading product. This of course is due to the basket of top quality stocks selected from the Nigerian Stock Exchange as well as a select mixture of fixed income securities such as FGN Bonds, Treasury Bills etc.

Are there risks involved?
Just like any investment, a Balanced Fund does come with its own risk. For example, a hybrid that is skewed towards equity could signify higher risk elements than one skewed towards fixed income securities. However, experienced fund managers understand how to properly weigh a Balanced Fund, assuring that risk is minimized without reducing the opportunity to maximize returns.  In fact, a Balanced Fund is inherently designed to mitigate the risk of investing in a high yielding investments.

By investing in a Balanced Fund, investors are protected from spikes associated with booms and a frenzy of depressing sell-offs associated with busts. Generally, analysts opine that a Balanced Fund would be expected to generate superior risk-adjusted returns in the long term than specialised funds.

As Nigerians start to regain confidence in the economy now is the time to consider the Balanced Fund that is best suited for your investment appetite.

Click here to subscribe to a Balanced Fund from United Capital Asset Management Ltd.

*This article was brought to you by United Capital Asset Management Ltd.

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