Should I be putting my money in a fixed deposit?
This was a question put forward by a Nairametrics visitor last week. Apparently, he had been approached by his account officer who had seen idle funds running into millions lying in his bank account. He had left the money in a savings deposit not knowing what to do with it.
We were shocked by this and asked him the following questions (responses ensued)
Are you saving the money because you need to use it within the next three months?
His response: No
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Do you currently earn a steady income?
His response: Yes
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Do you have investments in shares, real estate or other investments
His response: Not really
Do you plan to invest in any?
His response: Maybe real estate but I don’t want to buy land. I want to buy a house, so I will wait till I have the money
Do you have forex?
His response? No I don’t
On the back of this Q&A we then explained what we would do it we were in his position.
Fixed deposits – Yea or Nay?
Fixed deposit is a Nay for us in the current economic environment where inflation rate is above 16% and Treasury Bills rate are going for 17%.
Commercial Banks usually do not like offering fixed deposit rates that are higher than Treasury Bills rates. If they do, then the margins are often not more than 2%. We doubt many will get rates above 19% from Banks as that will be above the return on equity for most banks.
If commercial banks will pay you 17% to keep your money then why keep your money with them for less. If you are one so patriotic as not to like buying forex, then perhaps you can consider buying bonds or treasury bills. You can get as much as 17% currently.
What other alternatives?
Forex are the way to go currently and it is hard to bet against the dollar. Not when there is so much unrest in the Niger Delta and oil prices still below $50. A look at your external reserves at less than $26 billion is also a reflection of how bad things are. We will rather at this point buy as much dollars as we can at the right price. What is the right price?
We spoke to someone who buys and sells forex. He tells us that whenever the price of Naira strengthens against the Naira for three days consecutively, his strategy requires that he starts buying. He keeps buying till the price hits a floor. According to him, provided that external reserves remain low and oil prices low, he buys as he believes that the gains being recorded are mainly temporary.
It’s a risk considering how volatile this market can be. We know some people who bought at N400/$1 earlier in the year who have still not covered their losses. It’s a timing game but one that you are more likely to gain than lose. The difference is the time factor. If you wait long enough, you are sure that the exchange rate will cross N400 sooner enough than it will drop to N300.
Some other investors prefer to keep buying dollars believing that it will even reach N500. It’s hard to argue with these guys after all no one expected to see N400 this soon.
We love Stocks and some of our team members still invest in the stock market. However, we will not recommend stocks for anyone at the moment. Not with the volatility out there and the challenges faced by most industries. Avoid it if you do not have the skill.
This is a yay for us if you are looking to diversify your portfolio. A 17% return per annum is hard to beat especially for a risk free investment. Treasury Bills are a loan to the government and require little documentation. Though the returns are fairly lower than FX, it is still very much higher than fixed deposits.