Every now and then, people ask me how to invest in Treasury Bills (TBills). I respond by asking if they’ve heard of Mutual Funds, specifically Money Market Funds. In this article, I’ll explain both investment options so you can make an informed choice. You ought to 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 higher than the annual return on Treasury Bills and Money Market Funds, even though the latter fared better. Therefore, at face value, both options seem terrible. Essentially you are not gaining any real returns. However, many asset management firms have money market funds that give higher returns than TBills, while having similar levels of safety and a lower barrier to entry. Therefore, I typically recommend money market funds for basic savings. They are a way to pool funds while you wait to invest in other things. They also function as “vaults” to safely store funds. So, let’s see how TBills and Money Market Funds stack up against each other.
About Treasury Bills
TBills are financial instruments issued by the Central Bank, 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 a country doesn’t go broke and renege on its financial commitments, your money is safe. Returns on TBills are also typically tax free.
Retail investors like you and I can’t bid for TBills directly. 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 Nigerian 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. Some also allow you to buy TBills via a mobile app. (Many automated savings apps benchmark their investment returns to Treasury Bills.)
Discount Rates
When you buy say N100,000 worth of TBills, the “discount rate” is applied. Let me explain. 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 to top up later, assuming you bought through a bank, you can’t just add to your existing investment at any time. (Hence the advantage of using a savings app which provides more flexibility.) Also, if you have a sudden emergency and wish to take the funds out prematurely, your bank will penalize you for terminating early. In some cases the penalty is 20% of the return only (not principal).
Now, let’s move on to Mutual Funds
A mutual fund is a pool of funds aggregated from many investors. The minimum investment is usually affordable, say N5,000. The asset manager issuing the fund invests on behalf of all investors and remits returns relative to each person’s contribution.
Mutual Funds are a mix of different instruments. For instance, Money Market Funds are a combination of TBills and other securities like Commercial Papers (debt) issued by blue chip companies. Other Mutual Funds may include stocks while others include Government Bonds. If you are risk averse and want both your principal and returns to be assured, then look for a principal guaranteed mutual fund.
The primary advantage of mutual funds is the flexibility to top up your account at any time, while earning compound returns. If you invest N5,000 now and then 2 days later, invest another N5,000, the interest is applied daily or monthly to the total amount. 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 affected.
So, now that you know about TBills and Money Market Funds, if you need help opening an account, here are the steps.
Happy investing!
To learn more about my online course, where I discuss even more investment options, please visit this page.
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