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Lack of Information: The bane of mutual funds in Nigeria

4 years ago
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Lack of Information: The bane of mutual funds in Nigeria

That mutual funds have come to stay in Nigeria is not debatable but what is becoming worrisome in recent times is the slowing growth of mutual funds.

Not long ago, I did a piece on why the net asset value, NAV of mutual funds in Nigeria is falling. That is just the icing on the cake. There is a need to look at the health of the industry as a whole. Between 2017 through 2019, the Nigerian mutual fund industry exhibited so much life and zest in terms of NAV growth but that zest seems to be waning and waning fast.

Why is this so, you may ask? I have been asking the same questions too and each time I do that, the answer that readily comes to mind is that the lack of information and data is what is slowing the growth of mutual funds in Nigeria.

Sources of mutual fund information

There are various sources of mutual fund information that are used by investors for making investment decisions. There are formal sources of information like articles in newspapers, prospectuses, factsheets, magazines, and financial statements or reports.

Informal sources of mutual fund information include information from investors, family members, friends and relatives.

Factors that affect mutual fund growth

According to research, investors decision to participate in the mutual fund industry derives from their risk perception, their return perception, mutual fund awareness, and financial literacy. A deeper look into those factors indicates that they are all driven by the availability or lack thereof, of data and information.

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  • Risk perception

How investors perceive mutual fund risks depends on what they know about the mutual funds and mutual funds can only be known if there are information and data on them. There are many measures of mutual fund risks, like standard deviation, alpha, Sharpe ratio, beta, and r-square. Though the understanding of those risk measures depends on the financial literacy of the investors, the non-availability of such data increases the opacity and risk perception of mutual funds.

Read: World leaders reach landmark deal on a global corporate tax rate

High opacity and risk perception will act as disincentives for investors’ participation in the industry which in turn slows the growth of the industry.

  • Return perception

Return perception is yet another factor that could make or mire the growth of mutual funds. If investors perceive mutual funds as a means to achieve their investment goals of earning good returns on investment, they will be inclined or motivated to invest in mutual funds.

Investors return perception derives from historical returns of mutual funds. Only through the proper dissemination of information and data can investors form an opinion or perception about the returns of mutual funds. Unfortunately, mutual fund return data are not readily available in Nigeria.

When investors look at mutual fund returns, they not only look at the historical returns, they also look at the consistency of such returns over a period of time. Almost all mutual fund factsheets in Nigeria lack information on their historical return performance, yet such is and should be a major decision-making variable used by investors.

  • Mutual fund awareness

This is yet another factor that drives the growth of mutual funds and a factor that also depends on the availability of information. While fund managers have done and still do a great job in trying to increase the awareness of mutual funds through advertisements, event sponsorships and the internet, it is not very certain the extent to which Nigerian retail investors understand mutual funds.

  • Financial literacy

Financial literacy and schooling attainment have a positive effect on wealth accumulation. This is because people with less understanding of their financial environment are less likely to engage in wealth accumulation of which mutual fund investment is a part.

Financial literacy is the ability of someone to process economic information and make informed decisions about personal or family finances. Though literacy level is high in Nigeria, it does not look like financial literacy is as high. Even where it is, the fact that many young people are preoccupied with other family issues means that they do not pay much attention to investments like mutual funds.

What it all boils down to

The summary of it all is that to ensure that the Nigerian mutual fund industry grows and continues to grow, the government and the fund management companies should do well to provide investors with the data and information they require to make informed investment decisions.

In addition to that, they should create awareness of mutual funds as a large part of the investing public are still grappling with understanding what mutual funds are and how they work.

Source: nairametrics
Via: norvanreports
Tags: growth of mutual funds.Lack of Information: The bane of mutual funds in NigeriaNigeria
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