With the volatility of the Naira as a result of external shocks, many Nigerians have now formed the habit of investing in foreign currency to hedge risk.
Investment is traditionally seen as the commitment of resources to achieve later benefits. From an elaborate view, in finance, the purpose of investing is to generate a return on the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), investment income such dividend, interest as or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in foreign currency exchange rates.
Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses. Investors, particularly novices, are often advised to diversify their financial investments.
In Nigeria today, most investments are done in stocks, also known as equity in public traded companies, as well as Bonds which are loans to government and other businesses traded on public markets.
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In the same vein, people could invest cash, by holding onto a particular foreign currency in anticipation of spending or to take advantage of or hedge against changes in exchange rate.
Another area of investment is the real estate sector where investors rent or lease to provide ongoing income or resell if the property increases in value.
Dollar investments in Nigeria are gradually becoming a popular choice, especially for Nigerian investors as they offer more advantages and opportunities for higher returns than naira investments.
Some of these advantages include the differences in risk levels of both investments. Dollar-denominated investments are not subject to the same currency risk as naira-denominated investments. This means that dollar investors can avoid the volatility of the Nigerian currency and benefit from more stable returns.
They also offer higher potential returns than naira investments because dollar-denominated assets are generally more valuable than naira-denominated assets.
Finally, dollar investments are open to a wider range of people than naira investments as many dollar investment vehicles, such as stocks and bonds, can be purchased through online brokerages or apps.
Why dollar investments are becoming popular in Nigeria
In Nigeria today, many financial institutions have introduced different mutual funds investments for customers as part of measures to protect investments from the volatility of the Naira.
For instance, Norrenberger, an integrated financial service, while providing explanations said it launched the Dollar Fund, designed to help investors hedge their savings from the eroding effects of inflation and devaluation.
The Norrenberger Dollar Fund, approved by the Securities and Exchange Commission (SEC) is an open-ended mutual fund designed to provide investors with capital appreciation and diversification.
The Fund invests in highly liquid investments that provide liquidity to investors and invest in Eurobonds issued by governments and corporates and Dollar denominated Money Market Instruments and cash.
It has a minimum subscription amount of $500 and an additional subscription amount of $100 which means that investors can add to their investments at any time.
Pabina Yinkere, the Business Head, Asset management while commenting on Dollar fund in the country also said, “The launch of the Norrenberger Dollar Fund comes at the right time to help investors diversify their portfolio while also helping those with US Dollar obligations hedge against currency risk,” he noted.
He added that the objective of the Fund is to provide investors with the opportunity to invest in dollar-denominated instruments that help to mitigate the eroding effects on their investments due to the constant devaluation of the local currency, Naira.
“The Fund is targeted at retail and high net worth individuals, corporates, institutional investors and Africans in diaspora who desire exposure to Dollar denominated Fixed Income Securities. Investors can enjoy significantly higher returns than the average domiciliary account.”
The investment expert added that Norrenberger Turbo Fund (NTF) – a fixed income fund has overtime provided subscribers with competitive returns in the fixed income. In addition, he noted that dollar fund and the Norrenberger Islamic Fund (NIF) were both among the fastest-growing mutual funds in the market.
Giving insights on why dollar investments are gaining momentum, an investment expert, Dotun Orji, said Nigerians have become circumspect while investing in the local currency which is why many investors are turning their attention to the dollar.
“The experience in Naira dominated investments has proven to be risky over time due to external shocks as experienced in the past months which is why you see most financial institutions as well as its customers exploring the dollar option.
“However, despite the fact that the returns are high and risk is low, it is also advisable for the government to make the market more conducive for investments,” he added.