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Investing in Money Market Funds


Dr. Yemi Kale, Statistician General

Dr. Yemi Kale, Statistician General

The National Bureau of Statistics revealed Nigeria’s inflation rate was 18.3 percent for the month of October 2016, the highest in 11 years.

Higher inflationary trends mean the cost of goods and services will continue to rise in the near term eroding the purchasing power of most Nigerians, especially if income remains flat. What this also means for the average Nigerian is that disposable income will be worth much less and will continue to buy fewer goods than it typically used to.

Despite the negative effects of a higher inflationary environment, smart investors often see this as an opportunity to earn higher returns on their investments. Rather than watch the purchasing power of their investments be eroded by inflation, they take advantage of the situation by investing in money market funds that are benchmarked against the inflation rate.
Money Market Funds

A money market fund is an open-ended mutual fund that invests in short-term debt securities such as treasury bills, certificate of deposits, fixed deposits, bonds and commercial paper. Money market funds are managed by experienced fund managers who are trained to optimize shareholder returns by deploying a balanced mix of portfolio investing to ensure the investor’s money is safe and returns remain higher than the inflation rate.

A Money Market fund can provide numerous advantages for investors especially in a high inflation economy such as the current Nigerian environment. Here are some advantages to consider;

Low risk
The risks of investing in money market funds are limited. By investing in a pool of risk-free debt securities such as treasury bills, FGN Bonds, there is little risk of you losing your investments. The funds are mostly restricted to investing in securities rated triple-A, the safest ratings possible. So, there is almost no possibility of your funds getting stuck. You are also safe from the volatilities inherent in the stock market. Your capital is always safe so you can still use it for whatever you want.
High liquidity

Another advantage of a money market fund is that it can be quickly converted into cash at short notice. They do not have to reach the maturity date before one cashes out. So, if an emergency arises requiring cash, you are not stuck until maturity date. You can decide to pull out and take whatever profit that is accruable at that point. Therefore, it is a good option for people saving up for a project as the funds keep earning interest while they continue to save. Furthermore, you can use these assets as collateral in other deals involving cash or lending.

Higher returns than standard savings accounts
The first and most popular investment destination for Nigerians with a little cash to spare is savings accounts. However, most savings deposit accounts earn negative real interest rates after adjusting for inflation. This is in stark contrast to money market instruments that, as we mentioned earlier, are designed to earn rates that are higher than inflation, making them a more attractive investment proposition than savings accounts.

Start small and grow
You do not need to have N100 million to start investing in money market funds. With as little as N10,000, you can start enjoying the benefits of money market funds. The piece of the pie you get is as much as the investment you put in. This can be a very useful investment option for parents who are looking to save for their children’s future or towards their university education. It’s also tailor made for salary earners looking to stash away a portion of their earnings for a rainy day or looking to hedge against higher inflation environments by strengthening their purchasing power.

How to start investing?
Retail investors interested in investing in a money market fund can start by selecting any of the funds approved by the Security and Exchange Commission of Nigeria. One of the most reliable money market funds in Nigeria is the United Capital Money Market Fund operated by United Capital Asset Management. The fund has over N40 billion in assets under management with a proven track record of positive returns for investors. With a minimum of N10,000 and multiples of N5,000 thereafter, investors can invest their disposable income in a safe and well managed fund built to provide positive real returns.

A popular American president once said, “Never let a bad economic crisis go to waste.” While inflation might be high, with treasury bills and other government securities attracting yields of over 18 percent (the highest ever), most analysts agree that there has never been a better time to invest in money market funds.

The above article was written in partnership with United Capital by Guardian Brand Studio.

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