Benefits of Money Market Funds

Benefits of Money Market Funds

Benefits of Money Market Funds

It is far better to invest in a compound interest yielding investment than a simple interest yielding one.

Many young Nigerians may not have heard of the benefits of money market funds and some that have heard about it, may not understand the working principles behind it while a very few smart ones are already investing in it.

We will try to define money market funds in the simplest way possible; money market fund is an open-ended mutual fund that deals in short-term discount securities such as treasury notes, bank bills and promissory notes. The money market funds are managed by experienced funds managers who are trained to optimise shareholder returns by deploying a balance mix of portfolio investing to ensure the investor’s money is safe and return remain higher than the inflation rate.

A money market fund can provide numerous benefits for investors especially in a high inflation economy such as the current Nigeria economy. Here are some of the benefits to consider:

Low risk investment
The risks of investing in money market funds are very low; the fund managers invest your funds in very low risk debt securities such as treasury bills, FGN bonds. You are very sure your capital is safe from the volatilities incurred from the stock market.

Higher return than the inflation rate
With the current inflation rate in Nigeria stands at about 14.6%, inflation rate as we all know, it is the rate at which prices increase over time, resulting in a fall in the purchasing value of the money.

As prices rises, your money buys less and less goods and services, so it would be a very wise decision to put your funds in an investment that will always return an interest higher than the current inflation rate.
These high inflationary trends will make the cost of goods and services to continue to rise in the near term reducing the purchasing power of most Nigerians, especially if your income remains flats.

Despite the negative effects of a higher inflationary economy, money market funds are benchmarked against the inflation rate.

Higher returns than standard savings accounts
The most popular investment destination for many young Nigerians with a little cash to spare is saving accounts. When you deposit money in a bank account, you basically lend that money to the bank and earn interest, presently the interest rate on a savings account in Nigeria is between 3 – 4% but if you borrow money from the bank; the lending rate is between 20-21%.

Investing in money market fund you are sure of a return higher than the inflation rate, as at the last time I checked the interest rate for the money market was about 15%.
It has a compounding effect
Money market fund has a compounding effect on its interest; every interest accrued is added to the principal sum of the initial deposit. Your initial deposit grow at a faster rate than simple interest investment, the rate at which the compound interest accrues depends on your initial deposit and the frequency of compounding; it has a monthly capitalization with the annual rate of interest meaning that the compounding frequency is monthly.

Start small and grow
You don’t need to have a lot of money to start investing in money market funds, you can start investing as little as N10,000 and you can keep topping your account with a minimum of N5,000 to start enjoying the benefits. The different fund managers have their different start-up deposit, so you can contact them for proper briefing.

Investment for your children
This is a very useful investment option for parents, who are looking to save for their children’s future or towards their university education.
Parents can start saving for their children as soon as they are given birth to, so let’s say the parents are saving for their children university education 16 years from their birth. If they can save for their children for 16years with the compounding effect on their initial deposit, the parent would not need to worry about the school fees of their children from matriculation to graduation.

You can quickly converted into cash at short notice: Unlike other investment, you don’t have to wait until it reaches it maturity date before you can cash out. On a short notice, if you have any need for immediate cash you can apply for your funds and cash out.

It is a good option for people saving up for a project:
If you are planning for any project, say you want to buy a car, equipment, land etc, you can be saving up for the project as the funds keep earning interest while you continue to save.

Finally, while inflation rate might be high, with Treasury bill and other government securities attracting yields of over 18%; you will agree with me that there has never been a better time to invest in money market funds today. Dare to start with what you have and from where you are.

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