Every now and then, people ask me how to invest in Treasury Bills. I respond by asking if they’ve heard of Mutual Funds. In this article, I explain both investment options and leave you to make an informed choice. You should make investment decisions based on available information, your risk profile and your investment objectives.
As at the time of writing, Nigeria’s inflation rate was about 12%. The annual return on Treasury Bills was also 12%, while Money Market Funds were slightly higher at about 12.38%. (Update: Since writing, Treasury Bills have significantly dropped in value, hovering below 5% annual return on investment.)
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, many asset management companies have mutual fund products that yield higher returns, while still providing similar levels of safety as Treasury Bills. So, I recommend them for basic savings. They provide a way to pool funds while you wait to invest in other things. They also function as “vaults” to safely store funds from other investments. So, let’s see how TBills and Mutual Funds stack up against each other.
TBills are financial instruments issued by the Central Bank of Nigeria (CBN), on behalf of the Federal Government. They are used 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 financial 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 them through banks or asset management companies. We are thus charged a small management fee – about 0.1% of the face value of the transaction and 0.125% of the returns. When you visit your bank, you will be told the minimum amount you can invest. In some banks, it is N50,000. You fill a form instructing your bank to deduct the investment value from your account and you also specify the time frame – 30 days, 90 days and so on. It’s easy to buy TBills from a bank you have an account with. Sterling Bank also allows you to buy TBills via a mobile app, i-Invest. Many other savings apps like Piggyvest and CowryWise benchmark their investments to Treasury Bills.
When you buy say N100,000 worth of TBills directly from an institution, the “discounted rate” is applied. So, if the return on investment is 5%, only N95,000 is deducted from your account. On maturity, you receive N100,000. This means your interest is given to you upfront.
For TBills, If you agree to a tenure of 1 year when you invest, and you have N5,000 that you wish to add tomorrow, you can’t just top up your existing investment, if you bought through an institution, hence the advantage of using an app. With institutions, you may have to start a completely new TBills investment and the new top up won’t be added to your existing balance. Both will run separately. Also, if you have a sudden emergency and wish to take the funds out prematurely, 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 Mutual Funds. A mutual fund is a pool of funds from many investors. The minimum investment is usually affordable, say N5,000. The asset management institution that issues the fund, invests on behalf of all investors and remits returns relative to each person’s contribution. Now Mutual Funds are a mix of different instruments. For instance, Money Market Funds which are a combination of TBills and securities like Commercial Papers issued by blue chip companies raising funds. Other Mutual Funds include stocks while others include Government Bonds.
If you are risk averse and want both your principal and returns to be guaranteed, then consider Stanbic IBTC’s Guaranteed Investment Fund or Bond Fund, which usually have higher returns than their Money Market Fund. The primary advantage of mutual funds is the flexibility of topping up your account at any time, while earning compound interest. If you invest N5,000 now and then 2 days later, invest another N5,000, the interest is applied to the total balance. Thus, you can roll over your returns over time. If you wish to withdraw your funds in an emergency, as long as the portion you’re withdrawing has been in the account for 30 to 90 days (depending on the product you choose), there are no penalties. The penalty for withdrawing a deposit before the minimum period is typically a percentage of the return on only that portion. Your principal is never touched or affected.
So, now that you know about TBills and Mutual Funds, if you need help opening an account, here are the steps.
To learn more about my online investment course, where I discuss even more investment options in Nigeria, please visit this page.
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