When it comes to returns, treasury bills usually pay a lower rate of interest than treasury bonds because of their short maturity profile.
I am a businessman and I am currently considering various ways of investing my earnings. I am thinking of unit trusts and government papers. Which route would you recommend I take?
I salute your efforts in increasing the efficiency of your investments. When it comes to money, the time factor is crucial. When investing in government securities and unit trusts, it is important to understand their features and benefits.
Government securities consist of treasury bills and treasury bonds and are used by the national treasury to borrow money for budgetary requirements.
Treasury bills are short term with maturities of 91 days, 182 days and 364 days.
Treasury bonds are medium to long term with maturities ranging from two years to thirty years. Both treasury bills and bonds are low risk investments since the government is considered to be a sound borrower. Minimum amounts required are Sh100,000 for treasury bills and Sh50,000 for treasury bonds.
When it comes to returns, treasury bills usually pay a lower rate of interest than treasury bonds because of their short maturity profile. In addition, you need to constantly monitor them and re-invest the proceeds once they mature against an environment of constantly changing interest rates.
This requires good knowledge of the money market to get the best out of these investments. Treasury bills are sold through an auction system on a weekly basis while treasury bonds are sold on a monthly basis.
Treasury bonds are a good substitute for long-term investments. For instance, last month’s auction resulted in a fixed interest rate of 14.839 per cent on a 20-year treasury bond.
This means the holder of the bond is guaranteed interest at that rate for the next 20 years, payable after every six months directly to their bank account. By comparison, few businesses or alternative investments can match such a return, at minimal risk, for such a long period of time.
A money market fund is a unit trust fund where money from members is pooled and invested only in short-term interest-earning assets like treasury bills, fixed deposits and commercial paper.
One does not need to understand the technicalities of the money market to participate effectively. This is because all investment decisions of the unit trust are handled by experienced and professional investment managers for the benefit of the members. This is convenient for busy individuals as they can generate passive income while dedicating their time elsewhere.
Most investors are better off buying government securities through unit trust funds because of diversification and convenience.
Diversification enables one to own stakes in many different bonds at varying rates of return. In Kenya, unit trusts are licensed and regulated by the Capital Markets Authority (CMA), and you can get more information on service providers on their website.
Miriam Wavinya, is a financial adviser, Zimele Research. Write to: firstname.lastname@example.org