TUE. 31 JANUARY, 2023-theGBJournal| Nigeria’s savers have a job on their hands. Market interest rates – the rates available on instruments such as T-bills and available from bank deposits – are woefully below the rate of inflation.
Yet many savers have found that Money Market mutual funds offer superior yields, often in excess of rates offered by bank deposits and T-bill.
Among mutual funds, Money Market funds grew by 12.2% last year, only surpassed by US dollar funds which grew by 21.8%. Money Market funds account for 40.5% of all mutual funds, the largest segment in the industry.
How do Money Market funds provide superior returns? Given that they invest in T-bills, and T-bill rates have been plummeting so far this year, what are they doing right? One of the advantages of Money Market funds is that they have a choice of investments to hold and therefore can vary (within limits) these investments according to yield.
One such instrument is the institutional bank deposit (see chart) which we contrast with the regular commercial deposit. Banks need to attract deposits from the open market but often do so in bulk, offering juicy interest rates for large sums of cash.
They make these available to financial institutions that aggregate many different savers’ funds into large pools. Armed with large amounts of savers’ cash, financial institutions can negotiate superior interest rates from banks. Money Market mutual funds are among those financial institutions.
In recent weeks we have seen 1-year T-bills rates decline as many T-bill and bond redemptions have entered the financial system.
The system currently is liquid and banks are also seeing their deposit rates trend downwards. But the rates they pay for large short-term fixed deposits (typically 90-days and 180-days) are still mostly above T-bill rates.
One reason behind this is the Cash Reserve Requirement (CRR) which requires banks to hold at least 32.5% of their customer deposits with the Central Bank of Nigeria (CBN). This can leave banks short of cash when it comes to managing actual liquidity.
Are there any limits to this? Yes. Money Market mutual funds are generally required to hold at least 25% of their holdings in T-bills. Likewise, their own internal rules may limit what proportion of their funds may be held in bank deposits and there are rules on how much they can hold in ‘Other financial instruments’, a category that includes commercial paper. Different Money Market mutual funds have different rules.
Today the blend of T-bills with institutional bank deposits and other financial instruments permits most Money Market funds to indicate yields higher than: a) commercial bank deposits and b) T-bills.
According to the daily report of the Fund Managers Association of Nigeria (FMAN, see fman.com.ng/pricelist) there are 14 Money Market mutual funds that, as of last Friday, gave indicative yields ranging between 7.95% and 14.02%, with the majority indicating yields over 12.00%.
Of course, these are indicated yields and may change over time, but they are comfortably above those of commercial bank deposits and T-bills.-With Coronation Research
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