February 4, 2015. Usiere Uko

A writer and personal finance expert, Mr. Usiere Uko, continues his article on ways to invest in the money market

In part 2 of this article, I will step back and address one of the most common questions I received as a result of the series of articles on saving and investing in the money market ‘what is money market?’. Money market is a segment of the financial market where governments and organisations come to borrow short term funds, ranging from several days up to one year. So you are not wrong if you say that money market is where money is traded. As an investor, rather than leave your money idle in your account, you can move your money into the money market for your bank to loan out at an agreed rate of return to you. There is an agreed duration and interest rate. When the investment is booked, the money is taken out from your account; hence you have no access to it. Your interest income is guaranteed, whether the bank finds someone to loan the money to or not. With a money market account, you cannot access your money until the maturity of the investment. If you terminate the investment before maturity, you will pay a penalty, which is 25 per cent of the interest earned, for most banks.

A money market investment is different from a savings account. With a savings account, you are just leaving your money with the bank for safe keeping. You get minimal interest and you can withdraw your money anytime without penalty (although if you make more than two withdrawals a month, you lose your interest for that month with most savings accounts). The low interest rate of savings account do not encourage people to save, hence they turn it into a spending account. A money market account helps you keep away from the money for the agreed duration, which can be rolled over at maturity. You get a better rate, killing two birds with one stone – saving and investing. You can set up a system to save and invest regularly, so that your interest income starts to grow and becomes an incentive itself to keep saving.

Money market instruments

Examples of money market investments include fixed deposits, commercial papers, treasury bills, banker’s acceptance, treasury notes etc. Although bonds yield a fixed income, it is technically not a money market vehicle as tenors can range from five to 20 years. Each bank has its own bouquet of money market instruments and the best way to find out what is on offer is to ask or visit their website. You are not married to your bank; you should care enough about your finances to shop around for better deals. There must be a reason for sticking with your bank, not simply because it is closest to your house or office, or that the services are tolerable. What is the point complaining when you can vote with your legs? In this era of internet banking, you don’t need to be close to your bank physically. You need to make sure that your bank is giving you a good deal, and is truly your partner in progress to attaining your financial goals.

Different banks have different entry levels for each of their products. For some banks, you need a minimum of N100, 000 for fixed deposits. Others are higher. Same with treasury bills; some accept N10, 000 or below while other’s start from N100, 000. There is one way of finding out what is obtainable, ask around. Don’t assume every bank is like your bank. Rather than complain about your bank, move to another bank. I have moved banks before, including salary accounts when I was still in paid employment. The first time I tried to move, a senior manager talked me out of it, promising to address all my grievances. There were some improvements thereafter, but not up to the level I knew my colleagues were used to in other banks. When I decided enough is enough, I went back, and this time, I let them know my mind was fully made up. I got the release letter I needed to move my salary account to another bank. That encounter taught me a valuable lesson; when your mind is fully made up, you get what you want.

Investing in treasury bills

I still get questions on how to invest in treasury bills. I will leave out the technicalities to make it really simple. The Central Bank raises money on behalf of the Federal Government by issuing treasury bills (this can also be a tool for pulling excess money from circulation). The bills are through a bi-weekly auction, which usually holds on a Wednesday (today happens to be one of those days).This is referred to as the primary market. Treasury bills are usually for 91days, 182 days and 364 days. Only licensed brokers can participate in the auction. This includes banks, discount houses etc.

When investing in treasury bills, you have two options, put in a bid at the auction (primary market) or buy retail from your bank (who buys in bulk to sell to customers).

To participate in the auction, you have to put in your bid through your broker, in this instance, your bank. You can place your own bid or ask the bank to advise what bid to go with (which is advisable when you are just starting). This means you have to wait until there is an auction before you can bid.

To make it less complicated for you, you can start from the secondary market and then move on to the primary market as you grow your funds. Interest on treasury bills are typically paid up front (you receive your interest when your transaction is executed). You can reinvest your interest in fixed deposit or buy another bill with a shorter tenor from the secondary market. You can then pocket the interest on your interest. Leaving your interest alone makes your portfolio grow faster.

I would advise you do further reading, as the details would be another article of its own. Ugodre Obi-Chukwu did a brilliant job of this in his article of January 22, 2015: See link below:

www.punchng.com/business/am-business/how-to-invest-in-treasury-bills/

If you are really serious about investing in treasury bills, approach your account officer and tell her what you want, and she will be glad to put you through and guide you in filling the forms. Treasury bills are a risk free investment guaranteed by the government of the Federal Republic of Nigeria. You can hardly get more risk free than that. Do not get bogged down by analysis paralysis. Step out and just do it.

For questions and comments, you can contact him at usiere@gmail.com. Follow him on twitter@usiere, 08106788187 text only

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