Is investing in mutual funds still a great idea in 2024? (2024)

There is always a new shiny object popping up somewhere. That new kid down the block makes the old look outdated and subpar.

With digital currencies like Bitcoin hitting 157% returns in 2023 alone it may sound borderline ludicrous to even begin to suggest that high-risk investors should look at traditional asset classes like bonds, treasury bills and mutual funds.

Why take the slow lane when I can get stellar returns in the same time horizon?

However, as Bill Shankly aptly put it, “Form is temporary but class is permanent”. These traditional asset classes albeit producing lesser returns have consistently been the “go-to guy”.

Just like that old rocking chair that never disappoints, mutual funds yield returns that may be small but slowly compound over time.

What exactly are mutual funds?

Say you have appendicitis and are in urgent need of a surgical procedure. You have two options. Option A is a qualified surgeon with over 200 operations under his belt and B is a quack whose patients are lucky to escape his scalpel alive. It is a no-brainer that A is the better option.

In investing, mutual funds are like having a skilled doctor doing that operation. Mutual funds are offerings from licensed and seasoned investment professionals and houses that invest in a range of asset classes depending on ethics and risk.

While the average Joe may be uniform, these investment firms in most cases have entire departments that conduct research using complicated models before investing decisions are made.

They also have different offerings depending on the individual investor. For example, some investors who hold the Islamic faith may consider investing in some assets against their faith.

Most mutual fund operators have since developed halal-compliant funds that handpick assets that are compliant with the tenets of Islam.

The Stanbic IBTC Imaan fund (41.18%) exceeded expectations posting a 41.18% as at the last fact sheet released by the fund administrator in November 2023.

Some investors love the high adrenaline approach and for this reason, mutual funds have aggressive funds that offer slightly better returns and steeper downside potentials too.

ARM’s aggressive growth fund (11.4%) posted an 11.4% return as of its last fact sheet release. Just like at McDonald’s, there’s a fund that fits your risk and ethical appetite.

How did mutual funds perform in 2023?

2023 was a stellar year for most assets. Since mutual funds are an asset pool, you would expect an equally stellar performance from them.

Most funds that had exposure to the equities markets especially outperformed the others. The equities markets were on steroids and exposure meant higher returns. The NGX ASI index was up 44.43% in 2023 alone.

The S&P 500 had a 25.08% run and the NASDAQ almost doubled those returns for a 45.33% run in the previous year. It wasn’t rocketing science or black magic that funds had great performances in 2023 either.

Let’s take a look at some of the highest-performing mutual funds in Nigeria in 2023.

Stanbic IBTC absolute return fund YTD 6.86% Stanbic IBTC aggressive fund (49.9%), Stanbic IBTC balanced fund (26.75%), Stanbic IBTC bond fund (3.65%), Stanbic IBTC conservative fund (19.84%), Stanbic IBTC dollar fund (5.39%), Stanbic IBTC enhanced short-term fixed income fund ( 7.03%), Stanbic IBTC etf 30 (35.32%), Siaml pension etf 40 (52.24%), Stanbic IBTC ethical fund (34.03%), Stanbic IBTC guaranteed, Stanbic IBTC absolute return fund (6.86%), Stanbic IBTC aggressive fund (49.9%), Stanbic IBTC Imaan fund (41.18%), ARM aggressive growth fund (11.4%), ARM ethical fund (7.2%), ARM Eurobond fund (1.72%), ARM money market fund (13.01%).

Source: Stanbic IBTC fact sheet 2023, ARM fact sheet 2023

As we can see, funds like the ARM Eurobond Fund with zero exposure to the equities market performed poorly with just 1.72% in returns. Aggressive and balanced funds also posted more returns because of their typical exposure to risk assets. On average, the aggressive funds produce around 30% return in 2023.

Compounding yield on returns over time

Using data from 2023, we can say that we expect typical returns of 5-15% per year from investing in the top mutual funds in Nigeria.

To take real advantage of these opportunities, the investor may consider compounding returns over time. For example, if you have a N10,000,000 investment in a mutual fund that manages to produce 10% every year, you would double your money in seven and a half years.

Say you invested in 2000, by 2007, you would have N20,000,000 in your portfolio.

Are mutual funds 100% risk-free?

No! Mutual funds would only post returns when their underlying assets also post returns. Some funds can end the year in negative returns and investors lose money as a result.

In 2019, Stanbic IBTC Imaan fund was down -4.44%, and Stanbic IBTC ethical fund was down -7.72% underperforming the benchmark index with a -4.43% return.

In the same year, the fund’s Nigerian equity fund was down -8.90%. You can and will lose money investing in mutual funds.

Mutual funds vs benchmark indices

One disturbing statistic is the fact that more than 50% of mutual funds fail to outperform their benchmark indices.

This means funds whose primary assets are made up of US-based equities consistently get outperformed by the NASDAQ benchmark index.

This brings to mind Tim Morris’ book titled “Technical Analysis is mostly bullsh*t: Why Flipping a Coin is a better strategy than using technical analysis in the Financial, stock and forex markets”. In his book, Tim argued that a coin flip would outperform complex analysis over time.

While this may be a stretch, the statistics show that despite all of the analysis and research, by simply buying the S&P 500 index every year, you may outperform top mutual funds.

In 2019, a bulk of Stanbic IBTC’s funds were outperformed by their benchmark index. For example, the SIAML Pension ETF 40 posted a -18.43% return while its benchmark index posted a -12.70% return.

Over time though, a good fund would balance out and the prudent investor has a higher probability of being net positive.

Mutual funds vs Treasury bills

Some people mistake mutual funds for treasury bills aka T-bills. While they are both low-risk investments, that is where the similarities between them end.

Treasury bills are short-term debt instruments issued by the CBN on behalf of the Federal Government at a discount. These bills are paid in full upon maturity.

As we have explained, mutual funds on the other hand are not debt instruments. With T-bills, trust in the issuing body (the government) is the binding of the agreement but for mutual funds agreements must be reached in case funds are lost by the issuing firm.

In terms of safety too, T-bills are safer than mutual funds albeit they post lower yields compared to mutual fund returns.

Drafting a balanced mutual fund portfolio

Your mutual fund portfolio could be for other reasons other than accruing returns. For example, some investors who are looking for dollar exposure may invest in Dollar funds.

Others who are looking for the high-risk, high-reward approach may invest more in aggressive funds.

Here are the factors that determine how you create a mutual fund portfolio:

• Beliefs: If you hold certain religious and ethical beliefs then you may consider reflecting them in your portfolio. Devout Muslims may consider investing in only halal-compliant funds.
• Purpose: As mentioned earlier you have to determine why you are investing! Is it a hedge against your local currency devaluation or a quest for profits? Determining this first will help you make better picks that correspond with your ideas.

Let’s assume you have a N2,000,000 portfolio and wish to invest them in mutual funds. Out of this amount, you wish to simply hedge 50% against Naira volatility and look for potential returns with the remainder.

Looking at Stanbic IBTC’s fact sheet for 2021, we can draft and see how your portfolio would have performed.

With N1,000,000 set aside for hedging, we invest in the Stanbic IBTC dollar fund. In 2021, it printed 5.36% in returns. This is a N53,600 profit.

For the remainder of the portfolio, we decide to allocate 50% to an aggressive fund and the remainder to a conservative fund.

Investing N500,000 in the Stanbic IBTC aggressive fund in 2021 (12.73%) would yield N63,250 in returns.

A N500,000 in the Stanbic IBTC conservative fund in 2021(7.59%) would yield N37,950 in returns bringing the total return on investment ROI to N154,800 which is a 7.74% ROI on a N2,000,000 principal.

Although this may seem small, compounding over the years has produced great results. For context, the Stanbic IBTC dollar fund has produced >2% since 2019.

Top mutual funds to invest in 2024.

Stanbic IBTC absolute return fund.

Stanbic IBTC aggressive fund.

Stanbic IBTC balanced fund.

Stanbic IBTC bond fund.

Stanbic IBTC conservative fund.

Stanbic IBTC dollar fund.

Stanbic IBTC etf 30

Stanbic IBTC’s ethical fund

Stanbic IBTC guaranteed

Stanbic IBTC aggressive fund

Stanbic IBTC imaan fund

ARM aggressive growth fund ARM ethical fund.

ARM Eurobond fund.

ARM money market fund.