While smart investing is a sure way to build and retain wealth, it can be a daunting prospect for beginners. In the same vein, it is a lot easier when you understand the various options in which you can invest and ultimately grow your wealth. Here are some options you can consider when taking the step to managing your wealth like a pro – explained in simple terms:
Treasury bills (T-bills) are risk-free, short-term investment instruments that are issued by the Federal Government through the Central Bank of Nigeria (CBN). It is a way the government raises funds from individuals and organisations. They are considered among the safest investments with attractive returns since they are backed by the full faith and credit of the Federal Government. In addition, the longer the maturity date, the higher the interest rate that the T-Bill will pay to an investor. Although T-bills yield a lower rate of return compared to other forms of investment, they offer safety and a predictable profit which makes them a good choice for long-term investments in your portfolio.
When investing in T-bills, it is important to take note of the prevailing rate and your expected returns upon maturity. However, if you decide to sell before maturity, you may incur a loss depending on the prevailing market value.
A Fixed Deposit is a short-term investment that guarantees you a fixed interest rate when you keep funds for a specified period. The minimum tenor is 30 days and the maximum is 365 days – at the end of the agreed period (tenor), your principal and interest amount earned are paid to you. This product can also be used as security for cash-backed loans.
The ideal strategy for Fixed Deposit investments is to diversify and spread out your investments across various banks while striking the right balance between risk and returns. It is also important to note that if your Fixed Deposit investment is terminated before maturity, the total accrued interest not earned will be forfeited. This means that only the portion of interest earned during the period that your money was held is what will be paid to you.
Federal Government Bonds are long-term instruments issued by the Debt Management Office on behalf of the Federal Government of Nigeria (FGN). When you buy FGN Bonds, you are lending to the FGN for a specified period of time and the FGN is obligated to pay you the principal and agreed interest as and when due, meaning that they have no default risk. Not only do these bonds offer opportunities to investors willing to invest long-term but also attractive interests that are paid bi-annually (twice a year). FGN Bonds can be accessed through primary licensed dealers and before investing, pay attention to the prevailing rate, maturity, payment dates and expected returns so you can make an informed decision.
A Commercial Paper (CP) is a short-term unsecured debt instrument issued by financial institutions and large corporations with high credit ratings. As a short-term instrument, CPs normally mature within 270 days. CPs are issued at a discount, which means interest is paid upfront. CPs are more suitable for risk tolerance and before investing, you may want to do your due diligence on the issuing company and take note of its risk of default. This entails an evaluation of their credit rating, brand reputation and experience of the management team. While CPs offers a return on investment in 270 days or less, it’s paid at maturity, not periodically, like with FGN bonds and other similar debt securities. It may be wise to consider all of your investment options before investing in commercial papers.
Eurobonds are financial instruments denominated in a currency other than that of the issuer – for example, a Nigerian Eurobond is issued by Nigeria in U.S Dollars. Despite their name, Eurobonds aren’t necessarily denominated in Euros and can take many different forms. They are issued either by Governments or corporate institutions and are highly liquid i.e can easily be converted into cash, which is a key benefit of this form of investment.
Given that Eurobonds come as government and corporates, as a prospective investor, you have to decide which to buy. While corporate-issued Eurobonds may offer higher interest than government-issued ones, they also offer higher risk. Like every other investment, buying Eurobonds should be a well thought out process and it is advisable to review and understand the risk profile of any Eurobond that you are interested in buying.
Managing your wealth
Wealth management is personal and there’s no one-size-fits-all approach to go about it, which is why it is important to have the right knowledge and information.
Always start with a clear picture of your financial goals while understanding your risk tolerance. Once this is understood, diversify your portfolio with the mix reflecting your tolerance for risk. Understanding these investment options is essential, however, it is also important to rely on sound recommendations from experts while dismissing “hot tips” from unverified sources. While this can seem complicated, a good partner will make it simple – even exciting.
The digital investment app, M36, not only delivers a wide range of investment products, including those highlighted above, but also offers support by professional financial advisors to enable you make sound investment choices that suit your needs.