Money Market Investment Products and When to Use Them
Because we are in search of opportunities for advancing financial performance, we must probe the money market to see what it offers and where these could be part of the financial advancement equation. As you know, success is much about finding opportunities and cashing in to leverage one's position. Obviously the money market does not conjure that heady captivation of the stock market and that's simply because there are no capital gains. So, a 500% appreciation in five months, possible with the stock market, simply won't happen.
It would be misleading, though, to literally say "no capital gains, no show". No, those possibilities of the stock market come at considerable risk. Heavy losses are not only possible but do frequently occur. You should average out comfortably over time (hopefully), but it never pays to put all one's eggs in one basket. Getting some of your investment into the money market is therefore an option you shouldn't wave aside. They are fixed income securities, so like bonds, they help generate a steady stream of income. Their income is denominated in interest rates. While some are quoted on yield basis, others are quoted on discount basis. Either way, you earn income, enjoy more liquidity and in most cases, safety of capital. The question then: what specific investment options are available in the money market? Here are the key ones, their features and how you can blend them into your portfolio.
Treasury Bills
The Nigerian Treasury Bills, issued by the Central Bank of Nigeria, are short-term IOUs of the Federal Government of Nigeria. When you buy Treasury bills, you lend to the Federal government. Being government-guaranteed debts instruments and also of short tenor, T-Bills are considered risk-free. Usual tenors are 91 days, 182 days and 364 days. However, T-Bills are easily re-discountable, meaning that if you have to get it redeemed before its maturity, that is very open to you. Similarly, you can buy short-dated bills, that is, those with less than full tenor to maturity, should that be your requirement.
Who can invest in Treasury Bills? Everybody - institutions (like banks, discount houses, fund managers, etc) and individuals like you. Are there any benefits? Obviously, the safety of investment will rank highest. Keeping money safe is not so easy to achieve and can't be taken for granted - ask those who invested in liquidated banks. Though not providing the highest yield in the market, T-Bills have in recent years returned above the inflation rate, meaning you have a positive real income. As they are issued on discounted basis, they are not currently subject to withholding tax, leaving you off the tax-man's hook. Discount also simply means you are earning your income up-front, giving higher effective yield. Like other investments you may have, T-Bills can also be used as collateral, should you need to borrow and want to retain your investment. All said, this forms part of the liquid and high safety portion of your investment portfolio, and as your investment adviser will probably recommend, you need that portion.
Treasury bills are sold by auction, with a marginal cut-off rate - the rate that clears the offered stock. As an individual, you will need to buy through a financial institution, like your bank. Getting such investment done is as easy as providing the needed funding and instructing your bank to buy for the required amount. For the record, the minimum bill amount issued by the CBN, as at today, is N50,000 and in multiples of N1,000, thereafter.
Treasury bills are a solid investment instrument, with a guaranteed return of capital and income.
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Bankers' Acceptances
A bankers' acceptance (BA) is an investment instrument created by a company and accepted by a banker, giving it the backing of that bank. Technically, it is described as a sight draft, drawn on and accepted by a bank. What this is saying is that a non-financial institution - a company - draws a draft by which it orders the bank to pay, at a stated future date, a certain sum in money to bearer or a specified person. When the bank accepts this draft by stamping "accepted"
on its face and signing, it becomes a binding obligation of the bank, though originally drawn by the company. At maturity, the bank is obliged to honour it if a third party has invested in it.
BAs get issued by companies to help finance some of their transactions, usually import trade. What is common in our market is that the bank markets the BA and gets investors to buy it. What is really happening is that the instrument is rediscounted in the market. The point to note is that a BA is a money market instrument which an investor can take advantage of. BAs are traded at a discount - you pay the discounted value and receive the face value at maturity. Like T-Bills therefore, there is no withholding tax. Effectively, too, you earn your income up-front, meaning that the true yield is higher that the nominal rate. The obligation to pay you at maturity is effectively that of the bank: even if the drawer is unable to fund repayment, the bank has an obligation to redeem the BA. In effect, BAs are a relatively safe investment and will only be defaulted if the drawer cannot fund it and the bank also becomes financially distressed. With the current level of capitalisation of Nigerian banks, the risk of such default is even further reduced.
Should you invest in BAs? Consider the features listed in the last paragraph and add that BAs command a higher earnings profile than T-Bills (and bank deposits) and are also short term instruments and you will find that they are a good option for investment in the money market. As should be obvious, it is through your bank that you can find opportunities to invest in BAs. So, ask your account officer.
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