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Debt Securities

The Pain and Gain of Money Market Fund Investment

There is no doubt that Nigerians are in love with money market mutual funds considering the size of money market funds in relation to the entire mutual funds in Nigeria.

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shareholder investment, Solomon Udoh’s experience is why you should monitor your investment performance constantly

There is no doubt that Nigerians are in love with money market mutual funds considering the size of money market funds in relation to the entire mutual funds in Nigeria. It’s either Nigerians are predominantly risk averse or are always hungry for yield. The interplay between these two factors has made money market fund the mainstay of the Nigerian mutual fund industry.

There will mostly not be much left in mutual fund assets if money market funds are to be liquidated. It is the important position occupied by money market funds in the Nigerian mutual fund space that has prompted me to take a cursory look at the pains and gains of money market funds.

What are money market funds?

Money market funds are mutual funds or pooled investments that invest in short term fixed income securities like Treasury Bills, Commercial Papers, and similar instruments that mature within a year. In return, they pay interests, often times computed on a daily basis.

[READ FURTHER: Guide to making money by investing in Nigerian Fixed Deposits]

One of the characteristics of money markets mutual funds is that they are low-risk investments and therefore suitable for those that are risk-averse, conservative and retired or retiring soon. Another advantageous characteristic of money market funds is that they are quite liquid. And because they are near cash instruments, they can easily be turned into cash without little or no loss of value. Money market funds thrive more in an environment of rising interests or when the yield curve trends upwards.

Risks in Money Market Fund Investments

Many people are of the view that money market funds are not risky. That is a myth. Every investment has an element of risk. However, the good news is that money market funds occupy the lower end of the risk continuum compared to other types of investments. Though money market funds are low-risk investments, there is no guarantee that you cannot lose your money if the fund manager goes under. According to the US Securities and Exchange Commission, “while investor losses in money market funds have been rare, they are possible”.

[READ THIS: Businessman makes a strong case against equity investment]

Money Market Funds are Uninsured.

Money market funds are not bank deposits. Hence, they are not insured by the National Deposit Insurance Corporation. The implication of this, therefore, is that unlike bank depositors who stand to be compensated, up-to-the legally stipulated limit, if their bank goes bankrupt, there is no such compensation for investors in money market funds.

Reading some of the comments people make on some social media platforms like Nairaland, it does look like people tend to equate money market funds to fixed deposit accounts with the banks. While they share some characteristics, especially that of liquidity, they do not enjoy the same protection from the deposit insurance agency.

Unlike fixed deposit accounts with banks, where the depositor knows what rate of interest the deposit will earn over an agreed period, money market funds attract variable interests. The interests that money market funds attract depend on the dynamic nature of the yield curve and the activities of the economy as a whole. In a falling interest rate environment, money market funds tend to generate lower yield while the reverse is the case in a rising interest environment.

Inflation-Adjusted Yield

Money market funds’ yields may not always keep pace with inflation, especially in a situation or period with rising inflation. If this happens, money market fund investors may suffer losses in real terms but not necessarily in nominal terms. This happens when the inflation-adjusted return of a money market fund becomes negative because its yield lags inflation.

Fund Management Fees

Fund managers charge management fees and sometimes, performance fees on their Money market funds. In addition, they may charge such fees as early redemption fee, audit fee, legal fee, and so on. It is, therefore, advisable to be aware of the expense ratio of the money market fund you intend to invest in.

[YOU MAY ALSO LIKE: Mutual funds record positive but unimpressive performance in Q2]

Most importantly, read and understand the prospectus of the money market fund to know what risks you may be exposed to, what instruments the fund intends to hold as that may give you an idea of what to expect by way of yield or interest income.

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Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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Debt Securities

DMO debunks misappropriation rumour, clarifies missing N2.2 trillion in 2018 Appropriation Act

The DMO has debunked rumours of misappropriation of a N2.2 trillion debt service provision in the 2018 Appropriation Act.

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Debt Management Office resumes FGN savings bond offer on August 10, Eurobonds, Patience Oniha, DMO, External debt servicing

The Debt Management Office of Nigeria (DMO) has vehemently denied the rumour making the rounds that it was unable to account for the sum of N2.2 trillion allocated to its office in the 2018 Appropriation Act.

The agency in a recent disclosure available on its website described the claims as not only false but extremely misleading.

It is pertinent to note that the rumours became rife, after DMO honoured an invitation by the Public Accounts Committee of the House of Representatives, to explain how it spent the sum of N2.2 trillion provided in the 2018 Act. The DMO appeared before the aforementioned committee on the 26th of February, 2021.

Clarifying the issue, the DMO explained that of the N2.2 trillion provided in the 2018 Act; only the sum of N721, 251,798.00 was appropriated to its agency, while the remaining N2.1 trillion was earmarked for Debt Service. In lieu of this, the DMO emphasized that the appropriated sum of ₦2.2 trillion was not available as the DMO’s total allocation.

What they are saying

Commenting on the issue, a part of the press release reads: ‘’ The DMO wishes to emphasize that the provisions in the Annual Appropriation Acts for Debt Service, including the 2018 Appropriation Act, are dedicated for Debt Service payments only; that is, for the repayment of Principal, Interest and Other Charges for both Domestic and External Debt.

“Indeed, the funds for Debt Service are never released to the DMO for spending, rather, in line with the mandate of the Office of the Accountant-General of the Federation (OAGF), the funds are domiciled with the OAGF, who on the advice of the DMO, effects payments directly to the creditors as at when due. Such creditors include multilateral and bilateral lenders like the World Bank, African Development Bank, Exim Bank of China, investors in Nigeria’s Eurobonds, as well as, investors in securities issued in the domestic market such as FGN Bonds, SUKUK, Green Bonds and Nigerian Treasury Bills.”

It also went further to justify the need for Debt Servicing, emphasizing that: “The general public is invited to note that servicing of the public debt is absolutely necessary to ensure that Nigeria remains credit-worthy and retains or improves on its sovereign rating which ultimately, will support growth and development. It is for this reason as well as transparency purposes, that Debt Service is expressly provided as a line item in the Annual Appropriation Acts.’’

What you should know

  • The 2018 Appropriation Act authorized the Federal Government of Nigeria to withdraw a total sum of N9, 120,334,988,225 from the Consolidated Revenue Fund, in a bid to meet expenditure requirement in the 2018 fiscal year.
  • A breakdown of the 2018 Act showed that; N3,512,677,902,077 was earmarked for recurrent expenditure, N2,873,400,351,825 (capital expenditure), 2,203,835,365,699 (Debt Service and DMO’s allocation) and N530,421,368,624 (Statutory transfers).

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Debt Securities

DMO announces March 2021 FGN Savings Bond offer for subscription

The DMO, on behalf of the Federal Government of Nigeria, has offered for subscription, the March 2021 FGN Savings Bond.

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Debt management office, DMO,Nigeria's Debt to revenue ratio, DMO suspends April 2020 FGN savings bond offer

The Debt Management Office (DMO), on behalf of the Federal Government of Nigeria has offered for subscription, the March 2021 Federal Government of Nigeria Savings Bond.

This is contained in a notification published on the website of the agency on Monday. According to the notification, the savings bond offer comes in two tranches;

  • 2-year FGB Savings Bond due March 10, 2023: 5.181% per annum
  • 3-year FGN Savings Bond due March 10, 2024: 6.181% per annum

Details

  • Opening Date: March 1, 2021
  • Closing Date: March 5, 2021
  • Settlement Date: March 10, 2021
  • Coupon Payment Dates: June 10, September 10, December, and March 10
  • Units of sale: N1,000 per unit subject to a minimum subscription of N5,000 and in multiples of N1,000 thereafter, subject to a maximum subscription of N50 million.

According to the circular, the offer is backed by the full faith and credit of the Federal Government of Nigeria and charged upon the general assets of Nigeria.

Interested investors were however advised to visit their website in order to get the list of stockbroking firms appointed as distribution agents.

What you should know

  • Nairametrics had reported the offer for subscription of a similar Savings Bond in February with interest rates of 4.214% and 5.214% per annum for 2 years and 3 years tenor respectively.
  • The interest rate for the latest offer is, however higher than the offer announced in February. This could be a move to attract more investors to subscribe to the securities.
  • The FGN Savings Bond is an investment product issued through the Debt Management Office (DMO) on behalf of the Federal Government.
  • It also qualifies as securities in which trustees can invest under the Trustee Investment Act, and is listed on the Nigerian Stock Exchange.

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