HOW TO DIVERSIFY YOUR PORTFOLIO WITH COLLECTIVE INVESTMENT STRATEGY: EVERYTHING YOU NEED TO KNOW

In today’s fast-paced and ever-changing financial landscape, diversification is no longer just a buzzword. It’s a necessity. With market volatility, economic uncertainties, and shifting global trends, investors are increasingly turning to collective investment strategies to mitigate risks and maximize returns. But what exactly is a collective investment strategy, and how can it help you diversify your portfolio effectively? 

Let’s dive in.

WHAT IS A COLLECTIVE INVESTMENT STRATEGY? 

A collective investment strategy pools money from multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, real estate, or commodities. These strategies are typically managed by professional fund managers or investment firms, making them an attractive option for both novice and experienced investors. 

In Nigeria, the Investments and Securities Act (ISA) No. 29 of 2007 defines a Collective Investment Scheme as a scheme in which members of the public are invited or permitted to invest money or other assets in a portfolio. The scheme allows two or more investors to contribute money or assets and hold a participatory interest, sharing the risk and benefit of investment in proportion to their participatory interest. This legal framework ensures that collective investment schemes are well-regulated, providing a level of security and transparency for investors.

TYPES OF COLLECTIVE INVESTMENT SCHEMES 

Collective investment schemes come in various forms, each designed to meet specific investment objectives and risk profiles. Here are the main types of collective investment schemes:

1. Unit Trust: A Unit Trust Scheme is a fund into which small sums of money from individual investors are pooled together to form a larger fund. This pooled fund is then invested in stocks, shares, and money market instruments by professional fund managers on behalf of the unit holders (subscribers). Unit trusts are divided into units of equal monetary value, and investors benefit from diversification and professional management at a low cost. There are two types of unit trust schemes:

• Open-Ended Unit Trusts: These funds continuously create and redeem units based on the Net Asset Value (NAV), which is calculated as the total assets of the fund minus liabilities.
• Closed-Ended Unit Trusts: These funds issue a fixed number of units during the initial offering and are traded on the stock exchange. Investors can buy or sell units through their stockbrokers.

2. Venture Capital Funds: Venture capital funds provide early-stage financing to new and young companies seeking to grow rapidly. These funds are ideal for entrepreneurs with innovative business ideas but limited access to traditional financing. Venture capital funds are managed by venture capitalists who take on the risk of investing in high-potential startups, with the expectation of long-term gains. The process involves:

• Fundraising from institutional investors, wealthy individuals, and corporate organizations.
• Investing in viable business ventures with strong growth potential.
• Monitoring and enhancing the value of the investment.
• Exiting the investment through an IPO, merger, or acquisition.

3. Open-Ended Investment Companies: These are collective investment vehicles that allow investors to buy and sell shares directly from the fund at any time. The price of the shares is based on the Net Asset Value (NAV) of the fund, which is calculated daily. Open-ended investment companies offer flexibility and liquidity, making them a popular choice for investors.

4. Real Estate Investment Schemes (REITS): Real Estate Investment Trusts (REITS) are collective investment schemes that allow investors to pool funds for investment in income-generating real estate assets. REITS acquire, hold, and manage properties such as commercial buildings, residential apartments, and industrial estates. Investors earn returns through rental income and capital appreciation. REITS are an excellent way to invest in real estate without the need for large capital outlays.

5. Specialized Funds: These funds focus on specific sectors, themes, or investment strategies. Examples include sector-specific funds (e.g., technology, healthcare), ethical funds, and environmental, social, and governance (ESG) funds. Specialized funds allow investors to align their investments with their personal values or interests.

WHY DIVERSIFICATION MATTERS 

Diversification is the practice of spreading your investments across different asset classes, sectors, and geographies to reduce risk. The idea is simple: don’t put all your eggs in one basket. By diversifying, you can protect your portfolio from the impact of a single under performing asset or market downturn.

Some events that have underscored the importance of diversification. For instance:

• The Nigerian stock market experienced significant volatility in 2023, with the All-Share Index (ASI) fluctuating due to inflation, currency devaluation, and global economic pressures.
• The rise in inflation in Nigeria, which increased to 34.80 percent in December from 34.60 percent in November of 2024, has eroded the value of fixed-income investments, pushing investors to seek alternative asset classes.
• The real estate sector has shown resilience, with increasing demand for commercial and residential properties in major cities like Lagos and Abuja, making it an attractive option for diversification.

HOW COLLECTIVE INVESTMENTS HELP DIVERSIFY YOUR PORTFOLIO 

1. Access to Wide Range of Assets: Collective investment vehicles allow you to invest in a broad range of assets without needing to purchase them individually. For example, a unit trust might include stocks from the banking, consumer goods, and industrial sectors, providing instant diversification.

2. Professional Management: Fund managers have the expertise and resources to analyze market trends, select high-potential assets, and adjust portfolios in response to changing conditions. This is particularly valuable for investors who may lack the time or knowledge to manage their own portfolios.

3. Risk Mitigation: By pooling resources, collective investments can spread risk across multiple assets, reducing the impact of any single investment’s poor performance. For instance, a balanced fund might include a mix of equities, bonds, and real estate, balancing risk and return.

4. Cost Efficiency: Investing in collective funds is often more cost-effective than building a diversified portfolio from scratch. Transaction costs, management fees, and research expenses are shared among all investors, making it a budget-friendly option.

5. Liquidity: Many collective investment vehicles, such as mutual funds and ETFs, are highly liquid, meaning you can buy and sell shares easily. This flexibility is crucial during periods of market uncertainty.

RECENT TRENDS IN COLLECTIVE INVESTMENT IN NIGERIA 

1. Growth of Mutual Funds: The Nigerian mutual fund industry has seen steady growth, with assets under management (AUM) reaching over ₦1.5 trillion to almost ₦2 trillion in 2023 and Investors are increasingly turning to mutual funds for diversification and professional management.

2. Rise of Real Estate Investment Trusts (REITS): REITS have gained popularity as a way to invest in real estate without the need for large capital outlays. The Nigerian Exchange (NGX) has seen increased activity in REITS, with offerings like UPDC REIT and Skye Shelter Fund attracting investor interest.

3. Fixed Income Funds: With rising interest rates, fixed-income funds have become a popular choice for conservative investors seeking stable returns. These funds invest in government bonds, treasury bills, and corporate debt instruments.

4. ESG Investing: Environmental, Social, and Governance (ESG) investing is gaining traction in Nigeria, with more funds incorporating ESG criteria into their investment strategies. This trend aligns with global shifts toward sustainable and responsible investing.

5. Digital Assets and Fintechs: The fintech boom in Nigeria has opened up new investment opportunities. While direct investment in cryptocurrencies remains risky, some collective investment vehicles are exploring blockchain technology and digital assets as part of their portfolios.

TIPS FOR DIVERSIFYING WITH COLLECTIVE INVESTMENTS 

1. Assess Risk Tolerance: Before investing, determine your risk appetite and financial goals. Conservative investors may prefer fixed-income funds or balanced funds, while aggressive investors might opt for equity-based mutual funds or REITs.

2. Mix Assets Class: Combine different types of collective investments, such as equity funds, bond funds, and REITs, to create a balanced portfolio. Diversifying across asset classes can help reduce risk and improve returns over the long term.

3. Think Beyond Borders: While focusing on Nigerian assets is important, consider global funds or ETFs that provide exposure to international markets. This can help mitigate risks associated with local economic conditions.

4. Monitor and Rebalance: Regularly review your portfolio to ensure it aligns with your goals. Rebalancing involves adjusting your asset allocation to maintain diversification and manage risk.

5. Stay Informed: Keep up with market trends, economic developments, and fund performance. Knowledge is key to making informed investment decisions.

CONCLUSION

In conclusion, collective investment strategies offer a powerful tool for diversifying your portfolio and managing risk in today’s complex financial environment. 

By pooling resources with other investors and leveraging the expertise of professional fund managers, you can gain access to a wide range of assets, reduce risk, and achieve your financial goals. 

So, take the first step today-explore your options, consult with a financial advisor, and start diversifying your portfolio with collective investments. Your future self will thank you.