Safety in turbulent times

The current macroeconomic situation, the wild fluctuations in the stock and commodity markets, threats of recession and the grim predictions of IMF/ World Bank may be necessitating a flight to safety – Money Market (MM) instruments. These instruments are essential for proper investment portfolio diversification, but they are also the preferred investment choice in turbulent times. But what exactly is a money market instrument (or security)? How do they work? What makes them the preferred low risk investment option?

The wild price fluctuations and unpredictable profit scenarios mean that an investor in the stock market and other investments could receive little or no returns on their assets and even stand the risk of losing part of their principal. However, the risk of losing principal investment is close to zero in the money market. MM instruments have notoriously low returns on investment (because of the lower risks), but if capital preservation is important to you, they are the way to go.

The money market is where liquid financial instruments with relatively short tenures are traded. An MM instrument, sometimes called a bond, is actually a debt. The investor (bond holder)grants the bond issuer a short-term loan to enable the bond issuer meet operating expenses. In return the bondholder is paid an interest at an agreed interest rate (aka coupon rate) at agreed times, and at the maturity of the bond, the investor collects the original sum invested.Compare this to investment in company shares (equity), where the investor never gets the original sum invested back, because the money was used to buy her portion of the company; but she will receive dividends whenever the company makes profits.

These instruments can be easily converted to cash, so when the economy is more stable, you can move the funds to higher yielding investment vehicles. Returns and yields are predictable, hence the other name for MM instruments is Fixed Income instruments. Theyare issued by governments (national and sub-national), banks and companies. They can be secured or unsecured. Federal government bonds are generally classified as risk free because they are backed by the might of the country’s central bank. In Nigeria, they include the treasury bills (TBs), FGN savings bonds and FGN bonds. Interest earned from FGN instruments are tax exempt and therefore are not subject to the 10% withholding tax payable on other MM instruments. In addition, treasury bills pay the interest upfront; so, under the principle of time value of money, the interest received is actually higher in value than if it was received backend because the investor gets to use the money 90 days (depending on the tenure) earlier. The combination of upfront and tax-free interest makes TBs an excellent MM instrument.

State government bonds are also available. State governments issue them in order to generate bulk amounts of money to fund key infrastructure projects. The dwindling resources of state governments need not alarm investors as they are protected by the terms of the Bond; such that money for payments to bondholders are deducted from states monthly statutory allocations first, before the governors have access to the allocations. Sadly, with the current dire situation of state government accounts, this asset class may not be availablefor a long time, except maybe in the secondary market.

Corporate bodies also issue bonds. There are two main categories – commercial papers (CPs), which are unsecured bonds and bankers’ acceptances, which secured because they give the investor recourse to a bank in the event that the bond issuer defaults. Therefore, in buying CPs, the investor must ensure that only the best run companies are considered. Real estate developers also issue longer tenured bonds for the development of residential, commercial or infrastructure projects.

Fixed deposits are another form of MMinvestment.They are loans to banks for a specified number of days, which the banks in turn use to fund their operations, that is, lending to their customers. This is the reason banks frown are liquidating fixed deposits before maturity; they have relied on such deposits, lent out the money and in most cases, the borrower is not due to repay.

MM securities are regulated by the Securities and Exchange Commission (SEC). They are listed on the FMDQ Exchange (the MM equivalent of the Stock Market) for both initial offerings and secondary trading. To guide your due diligence, look out for the rating given the instrument by reputable rating agencies like Agusto and Co.

If you are risk averse and looking for safe havens to put your assets at this time, the money market could be your good choice. Happy investing.

YOU SHOULD NOT MISS THESE HEADLINES FROM NIGERIAN TRIBUNE

We Have Not Had Water Supply In Months ― Abeokuta Residents

In spite of the huge investment in the water sector by the government and international organisations, water scarcity has grown to become a perennial nightmare for residents of Abeokuta, the Ogun State capital. This report x-rays the lives and experiences of residents in getting clean, potable and affordable water amidst the surge of COVID-19 cases in the state…

Selfies, video calls and Chinese documentaries: The things you’ll meet onboard Lagos-Ibadan train

The Lagos-Ibadan railway was inaugurated recently for a full paid operation by the Nigerian Railway Corporation after about a year of free test-run. Our reporter joined the train to and fro Lagos from Ibadan and tells his experience in this report…

[ICYMI] Lekki Shootings: Why We Lied About Our Presence — General Taiwo

The Lagos State Judicial Panel of Inquiry probing the killings at Lekki Toll Gate, on Saturday resumed viewing of the 24hrs footage of the October 20, 2020 shooting of #EndSARS protesters by personnel of the Nigerian Army…

You might also like
Comments

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. AcceptRead More