Every now and then, people ask me how to invest in Treasury Bills. I respond by asking if they have heard of Money Market Funds. In this article, I explain both investment options and leave you to make an informed decision. You should make investment decisions based on information, your risk profile and investment objectives.
As at the time of writing, Nigeria’s inflation rate was 12.5%. The annual return on Treasury Bills was 12.355%, while for Money Market Funds, it was 12.38%. At face value, both options seem terrible, as they do not shield your funds from inflation. Essentially you are not gaining any real returns. However, inasmuch as they offer better returns than a bank savings account (4.2%) or special account like Alat (10%) or PiggybankNG (10.95%), I still recommend them as basic savings tools. They provide a way to pool funds ahead of other investments. They also function as “vaults” to store funds from other investments.
Now let’s see how TBills and Money Market Funds compare with each other.
TBills are financial instruments issued by the Central Bank of Nigeria (CBN) on behalf of the Federal Government. The Government uses them to raise funds and to provide liquidity to financial markets. They are guaranteed by the Government and as long as Nigeria doesn’t go broke and renege on its commitments, your money is safe. TBills are also tax free. Retail investors like you and I can’t bid for TBills directly from the CBN. Instead, we purchase TBills through our banks. We are thus charged a small management fee – about 0.1% of the face value of the transaction and 0.125% of the returns. (See chart at the bottom of this post, for a comparative analysis of TBills and Money Market Funds. The chart does not take into consideration, additional investments you may make to your Money Market Fund Account. It assumes your starting balance is your only investment during the year.)
When you visit your bank, you will be told the minimum amount you can invest. In my bank, it is N50,000. You fill a form instructing your bank to deduct the investment value from your bank account and you also specify the time frame – 30 days, 90 days and so on. So, for TBills, ideally you should buy from a bank you have an account with. Sterling Bank also allows you to buy TBills via a mobile app.
When you invest in N100,000 worth of TBills (for example), the “discounted rate” is applied. So, only about N87,000 is deducted from your account. On maturity, you receive N100,000. This means your interest was already given to you upfront.
For TBills, If you state a tenure of 1 year when you invest and you have N5,000 that you wish to add to your savings tomorrow, you can’t just top up your existing investment. It doesn’t work that way. You have to wait until you have up to the minimum stipulated by your bank – in my case, N50,000. Then you start a new TBills investment. It won’t be added to your existing balance. Also, if you have a sudden emergency and wish to take the funds out in the 8th month of your investment, you will be penalised for terminating the 1 year tenure early. In some cases the penalty is 20% of the return (not principal). After the deduction of the penalty, the balance will be remitted to your account.
Now, let’s move on to Money Market Funds.
Money Market fFunds are mutual funds. A mutual fund is a pool of funds comprising many investors. The asset management institution that issues the fund, invests on behalf of all investors and remits returns relative to each person’s contribution. The minimum investment amount is usually affordable, say N5,000.
Money market funds are a mix of government securities like TBills and securities issued by blue chip companies who wish to raise short term funds. An example of such securities is Commercial Papers. Both your principal and returns are guaranteed by the asset management institution e.g Stanbic IBTC Asset Management or ARM. Many strong commercial banks like First Bank also have asset management subsidiaries that offer Money Market Funds.
The primary advantage of money market funds is the flexibility to top up your account at any time, while earning compound interest. Because the annual interest is applied on a daily basis, if you invest N5,000 now and then 2 days later, invest another N5,000, the interest is applied to the total balance. Unlike TBills, your new investment is added to your existing balance. You can thus roll over your returns from month to month and add it to your balance. If you wish to withdraw your funds in an emergency, as long as the portion you’re withdrawing has been in the account for up to 30 days, there are no penalties. The penalty for withdrawing a deposit before 30 days is 20% of the return on only that portion. Your principal is never touched or affected.
If you choose to open a Money Market Fund account with a bank’s asset management institution, you don’t need to be a customer of the parent bank. Your money market fund account is treated as a separate account. If a bank insists you should open a bank account with them, they are using you to meet their target. It is absolutely NOT a requirement.
So, now that you know about TBills and Money Market Funds, if you need help opening a Money Market Fund account, join this mailing list and select Money Market. I’ll send you step-by-step guidelines. I’ve also written more articles about investing here.
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