Written on :
Last week, I wrote a post about
my experience investing in 2 mutual funds in Nigeria
I got a lot of questions, per usual.
I decided to answer 2 top questions with a follow up post today.
The 2 key questions are;
Will the annual return on money market mutual funds continue to be 15%?
Is it more profitable to invest directly in treasury bills?
I thought these were great questions.
They reflect the primary knowledge required in investing which is an understanding that rates/yields on investment do not remain the same forever. They change based on what's happening in the economy or corporate world.
Let's start with the first question.
Will the annual return on money market mutual funds continue to be 15%?
No, it MAY not continue to be 15%.
and that's because 15% is the historical rate of return on the money market mutual funds I blogged about last week. i.e. this was the reported rate of return for 2017.
The mutual fund might not give the same rate of return next year. The return on a mutual fund is based on multiple factors; the investment capacity of the company, the skill base of the internal investment team and the yield on the underlying investment securitie.
The investment capacity of a company is the strength of the nest asset value of its funds. Basically, you can negotiate for better rates with more money. the investment team's skill base is a critical factor. I think the African proverb, '
What an adult can see sitting down, a child cannot see standing up' explains this best.
What are underlying investment securities? They are marketable securities held by a money market fund in its portfolio. Popular examples of these marketable securities include treasury bills, commercial fixed deposits, commercial papers etc.
If you are concerned about rates, you can consider investing in at least 2 different funds; a money market fund or an equity fund/mixed investment fund. That way, you can take advantage of growth in either fund.
If you're conservative investor, you may consider mixed investment funds. Mixed investment funds invest in at least 2 financial markets. They may invest in any combinations of the stock market,money market or other markets.
Is it more profitable to invest directly in treasury bills?
No, it MIGHT not be as profitable to invest directly in treasury bills at the moment.
At the moment, the yields on Nigerian treasury bills have dropped significantly this year. For instance, the 364 day bill offers a 14.1% yield (as at March 16th, 2018) compared to the average 22% yield on this same bill last year.
The drop in yields is as a result of an ongoing debt adjustment exercise by the central monetary authority and debt management office. In really simple terms, the government wants to borrow money at lower rates and for longer tenors, so there are efforts to issue more long term Federal Government bonds and do more external borrowing.
Yields on money market instruments are likely to keep on dropping this year. This is why you might be better off investing in a mutual fund this year. A mutual fund will invest in a diverse mix of investment securities you might not be able to invest in yourself.
Again, remember that the entire point of a mutual fund is to do the work you don't have time to do yourself; research investment opportunities and stay current on yields to always get the optimal yield. If you are interested in doing this yourself or have the time and resources to do it yourself, then by all means, feel free.
Feel free to share any more comments or questions in the comment section, I'll get to them.