A Guide to Investing in Money Market Funds in Nigeria

A Guide to Investing in Money Market Funds in Nigeria

Money Market Funds in Nigeria

In this article, you will discover what money market funds are, how they can benefit you, and the straightforward steps to start investing.

If you are a newbie to investing, investing your hard-earned money can be an overwhelming task. With a plethora of investment options, choosing the right one that aligns with your financial goals is no small feat. This is why money market funds may be a good place to start your investment journey. Their simplicity and accessibility offer a great choice for investors without experience. They allow you to invest in low-risk options, while potentially achieving steady growth for your capital.

What Are Money Market Funds?

Money market funds are a type of mutual fund that primarily invests in short-term, low-risk securities. These securities typically include government bonds, Treasury bills, bank certificates of deposit, and high-quality corporate debt. The primary goal of money market funds is to preserve capital while providing a modest return.

How Do Money Market Funds Work?

The mechanics of money market funds are quite straightforward. Investors pool their money into a fund, managed by a professional fund manager. This manager, often backed by a team of experts, allocates the pooled funds into a diversified portfolio of short-term, high-quality assets. As the underlying securities earn interest, the fund generates returns. These returns are then distributed among the investors, typically on a daily or weekly basis.

Where Do Money Market Funds Invest?

Money market funds focus on investing in assets that are considered safe and highly liquid. Here’s a glimpse of the types of securities you might find in a typical money market fund’s portfolio:

Treasury Bills: These are short-term debt instruments issued by the government. They are considered one of the safest investments.

Commercial Paper: These are unsecured, short-term debt securities issued by corporations to fund their immediate financial needs.

Bank Certificates of Deposit (CDs): CDs represent deposits made with banks for a specified term and interest rate.

Repos (Repurchase Agreements): These are short-term agreements in which the fund buys a security with an agreement to sell it back to the seller at a slightly higher price.

Short-Term Government Bonds: Money market funds may also invest in short-term government bonds, such as Treasury notes.

In essence, money market funds offer investors a way to park their money in a low-risk, highly liquid, and professionally managed investment vehicle. They aim to provide a secure place for your money to grow steadily, even in a fluctuating financial landscape.

Why Money Market Funds Are a Smart Choice

Safety First

One of the primary reasons investors turn to money market funds is the safety they offer. By investing in low-risk, high-quality assets, these funds aim to protect your capital. Unlike more volatile investment options, money market funds prioritize the preservation of your money.

Liquidity at Your Fingertips

Another notable advantage is liquidity. Money market funds are highly liquid, meaning you can access your money quickly and easily. This makes them an ideal choice for those who might need cash on short notice or wish to maintain a flexible investment.

Steady Returns

While money market funds aren’t designed for high returns, they offer something equally valuable: predictability. They aim to provide investors with a steady and reliable stream of income. This can be particularly appealing to those who prioritize consistency over potential windfall gains.

Types of Money Market Funds

Money market funds come in various types, each with its unique characteristics. Here is a list of the most common ones:

Open-End Money Market Funds

Open-end money market funds are the most common type. These funds issue an unlimited number of shares to investors at the net asset value (NAV) per share. Investors can buy and sell these shares on any business day, and the fund itself typically does not have a maturity date.

Closed-End Money Market Funds

Closed-end money market funds operate a bit differently. They issue a fixed number of shares through an initial public offering (IPO). After the IPO, shares are bought and sold on secondary markets like stock exchanges. These funds often have a maturity date and may trade at a premium or discount to their NAV.

Sharia-compliant Money Market Funds

For investors who adhere to Islamic finance principles, sharia-compliant money market funds provide an option that complies with these principles. These funds follow specific guidelines to ensure that investments comply with Islamic law, particularly regarding interest (Riba) and risk-sharing (Mudarabah).

Getting Started: Investing in Money Market Funds in Nigeria

The first step to starting your investment journey with Money market funds is usually to scout for fund managers.

Select a reputable fund manager

Fund managers play a pivotal role in selecting and managing the assets within the money market fund. Look for experienced professionals or reputable fund management companies with a proven track record of making sound investment decisions. Here are the top fund managers in Nigeria.

Open a CSCS account

Once you have selected the right fund manager to aid your investment journey, the next step will be to open a central clearing systems account. Usually, your chosen fund manager will help you with this process. The CSCS is the central depository for the Nigerian capital market. It acts as the custodian of your investment, ensuring safekeeping and transparency.

Choose a fund to invest in

There are a host of Money market funds that are available in the Nigerian market. Here is a list of the registered and approved funds plus the corresponding ratings.

COMPANYRATINGEXPIRY
ValuAlliance Money Market FundA+(f)Apr 02, 2024
Stanbic IBTC Money Market Fund.Aa-(f)Dec 31, 2023
Cordros Money Market FundBbb+(f)Mar 05, 2024
First Trustees ARM Money Market FundAa-(f)Dec 07, 2023
Zenith Money Market FundA-(f)Mar 23, 2024
EDC Nigeria Market FundA(f)Oct 08, 2024
First Ally Money Market FundA(f)Jun 25, 2024
Coronation Fixed Income FundA+(f)/FV4Feb 19, 2024
Chapel Hill Denham Money Market FundA+(f)Mar 26, 2024
Coronation Money Market FundA+(f)Dec 31, 2023
Legacy Money Market FundA+(f)Oct 03, 2024
FBN Money Market FundAa-(f)Dec 31, 2023
Anchoria Money Market FundBbb-(f)Dec 04, 2023
GDL Money Market FundBbb-(f)Jul 02, 2024
Zedcrest Money Market FundBbb+(f)Apr 24, 2024
Meristem Money Market FundA(f)Dec 20, 2023
Abacus Money Market FundA(f)Dec 13, 2023
Vetiva Money Market FundA+(f)Dec 15, 2023

Key Factors to Consider When Choosing a Money Market Fund

While money market funds are known for their low risk, it’s important to consider specific factors before investing:

Fund Fees

Understand the fee structure associated with your chosen money market fund. These fees can include management fees and operational expenses. A clear grasp of the costs involved will give you a realistic expectation of your returns.

Minimum Investment Requirements

Different money market funds may have varying minimum investment requirements. Ensure that your chosen fund aligns with your investment budget.

Track Record of the Fund Manager

Assess the performance and track record of the fund manager. Look for consistency in generating returns and their ability to preserve capital. You may want to ask of the fund managers track records during the account opening process. Make sure you are speaking to more than one Fund manger to be able to make comparisons.

Completing the Application Process

Once you’ve chosen a money market fund, you’ll need to complete the application process. This typically involves filling out an application form provided by the fund management company.

Fund your investment

To invest in the money market fund, you’ll need to fund your account. Most funds accept contributions through bank transfers or direct debit from your bank account.

Final Thoughts?

Finally, investing in money market funds is a practical and accessible way for both novice and experienced investors to safeguard and grow their finances. These funds offer a unique blend of safety, liquidity, simplicity, and steady returns, making them a smart choice in the ever-evolving landscape of financial investments.

Considering factors such as fees, minimum investment requirements, and the track record of fund managers is crucial for making informed investment decisions. While money market funds are known for their low risk, it’s important to strike a balance between their benefits and risks, such as potential lower returns and exposure to interest rate fluctuations.

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