With the launch of the Federal Government Savings Bond earlier this week, I thought I would shed some light on the benefits of this investment vehicle but I changed my mind…slightly. Overall, the FGN Savings Bond is good for Nigeria and is great for you but rather than just focusing on the Savings Bond, I decided to compare it with other existing vehicles that are available to you as a retail investor. So, I will be sharing with you 6 different ways you can save N5,000 monthly.
So what makes this Savings Bond so great? Well, for one, it’s a guaranteed bond meaning that the Government guarantees to repay you in full at the agreed date.
I’ll be weighing their merits and demerits, benchmarking them against indices like inflation and also comparing them relative to each other so at the end of this series of posts, you’ll understand the ideal savings plan based on your personal circumstances.
If you are reading this on a smartphone right now with data you bought by yourself, then you have no excuse not to be able to save at least N5,000 every month. Also, if you’ve been finding it difficult to save regularly, well, this one’s for you.
Alright, let’s start with the FGN Savings Bond. Retail Savings Bonds have been around for close to 100 years in countries like the United States for example but Nigeria is just catching on. That’s really because, up till now, our government hasn’t really needed to borrow as much as they have been doing recently.
So, what is a bond? Well, a government bond is essentially a loan to the Government. It is a contract between you (the bondholder) and the Government (the Issuer) whereby the issuer promises to repay you a specified amount at the end of a period. It also promises to pay an interest (which is called a coupon) periodically. This interest can be paid yearly but in the case of the FGN Savings Bond, the interest is paid quarterly.
The Nigerian Government borrows from corporate investors and high net worth individuals all the time but the figures are so large, that many of us cannot participate. With this Savings Bond however, the Federal Government is giving every Nigeria an opportunity to lend a minimum of N5,000 and this will be paid back after 2 or 3 years depending on the issuance. Remember I said that there will be a coupon paid quarterly, well this is presently set at 13.01%.
So what makes this Savings Bond so great? Well, for one, it’s a guaranteed bond meaning that the Government guarantees to repay you in full at the agreed date. Your next question might be, “Should I buy the Savings Bond?” Well, there are a lot of reasons why you should. The Federal Government guarantee means that it is as risk free as an investment gets and the government plans to issue these bonds on a monthly basis so you can continue to buy the bond month on month with the knowledge that your money is safe. Furthermore, you are unlikely to find any legitimate fixed income security that can pay anything close to 13% for a N5,000 savings and still pay a quarterly coupon.
Thirdly, and this is very unique. The bond is trade-able on the stock exchange which means that if you want your money back before the maturity of the bond, you can simply sell it. You will likely have to trade the bond for less than its face value but at least the window is there for you if you need it.
The downside of this vehicle for savings however is that if you have a savings target of say N50,000, and you save N5,000 monthly, you won’t get your N50,000 cash back at once. Remember that each bond has a maturity date 2 or 3 years in the future so if you save N5,000 every month for 10 months, only the bond purchased in the first month would have matured at the end of 10 months. You will have to wait till the maturity date of the last bond before you can get all your N50,000 back unless of course you sell on the stock market.
Lastly, even though the coupon is guaranteed, the rate is still lower than the current inflation rate which is 17.78% today. So assuming that you buy the bond today and the inflation rate remains unchanged until maturity in 2 or 3 years from now, your investment will be worth 4.7% less.
So to summarize, as a regular savings vehicle, the FGN bond offers a guarantee, an unbeatable interest rate for the amount you are investing, paid quarterly but the unbeatable interest rate doesn’t beat inflation.
So if the Federal Government can’t pay an interest that beats inflation, who can? One of the savings vehicles that can yield you arguably the highest return is the stock exchange.
The Nigerian Stock Exchange
The stock exchange or stock market is a mechanism by which individual and corporate investors can trade ownership in public liability companies and certain listed securities like the bond we just talked about. Mainly though, the stock market is where you can buy shares day to day in companies that have plc at the end of their name. There are some companies with plc at the end of their name but are excluded from the stock exchange and those are private liability companies. I will touch on them in part 2.
What makes the stock market such a veritable hub of financial activity is that price of a company’s shares is influenced by the performance and future prospects of the company itself, the number of shares available for sale relative to demand, overall government fiscal and monetary policy and also macroeconomic circumstances in the country. The weighted average price of all the shares put together is called the All Share Index and the performance of this index is one of the best indicators of a country’s overall health.
What makes the stock market a good savings vehicle therefore is that prices can rise quite significantly over a short period if all influencing factors are positive. It is not unheard of for a company to report a gain of over 100% in its share price within a year as we saw in 2007 for example when several companies returned over 100% gain and one company in particular recorded a gain of over 500%. Secondly, there is no minimum number of shares you can buy at any time so you can easily invest N5,000 on a monthly basis until you hit your target.
As share prices can rise significantly, so too can they fall in similar fashion. We saw a sharp decline in prices in mid-2008 when the market bubble burst and many investors literally lost their shirts, homes and livelihoods.
By now, you would have noticed a trend between risk and reward. The higher the potential gains, the higher the risk of losing your savings altogether. If you fell for a recent pyramid scheme that collapsed recently, you will have first-hand knowledge of this. For this reason, the stock market is not the most ideal for short term savings. There is a potential to quickly double your money within a year but there is also a risk that your savings will be eroded even as you make additional monthly purchases of shares. The stock market is more ideal for longer term savings. If you have a one year old baby for example and you plan for him or her to study medicine at Harvard University in 17 years, then saving a fixed amount every month in shares as part of a wider investment strategy would be ideal because despite the regular peaks and valleys in share prices, over time, share prices of the top companies always usually go up over time.
So in summary, the stock market can offer you superior, inflation beating returns. That is the main reason to invest your money here but it is risky.
Some people think it is akin to gambling but it really isn’t. Investing in the stock market means you need to study the company you’re are investing in, the industry they operate in and the factors that affect their production and sales cycles, for example, the weather. It would be important to also know a bit about the influences on the buying decisions of their customers. We know most people pay school fees for their children in January and need cash so that may not be the best time for a bank to launch a savings promo. Furthermore, savings account deposits are low during the period especially after the heavy withdrawals for Christmas activities. All these factors can influence the share price of a company either slightly or significantly.
If you don’t mind some element of risk but you don’t care for all the research that goes into stock market investing, there is another savings option that provides a balance between risk and reward. I’ll be talking about mutual funds in part 2 of this post.
Enough Talk, Time To Act
So enough said. It’s time to act. As I post this article, you have two and a half days left in the March window but not to worry, there will be an issuance every month. Ask knowledgeable people to recommend a good stockbroker and register with them as a customer. You can ask me for recommendations too via Twitter and Facebook. They will guide you through the process of buying the bond regularly.
If the stock market is more of your thing, a good stockbroker is also the way to go. Good luck.