Treasury bill is noted as one of the most popular investment products globally, mainly due to its simplicity and low-risk nature. However, the proliferation of mutual funds, particularly money market funds, has led to diversion of some investors from T-bills. Some questions still remain unanswered regarding Treasury bill vs. mutual fund investment. Such questions are similarly raised by well-informed investors as well as potential investors who wish to make good choices in their investment decisions.
Just about a week ago, I happened to have a discussion with one of Sikasεm’s followers. After almost an hour chat with Kenneth, he asked:
“If you were going to invest in an Mfund, why not just buy a treasury bill?”
The argument centred on the fact that managers of money market funds invest collected pool of money in fixed income securities such as T-bills. As such, won’t it be logical for investors to buy the T-bills rather? While Kenneth’s argument appears laudable, both T-bills and mutual funds have their own pros and cons that must be carefully reflected on (Note: ‘mutual fund’ as used in this write-up refers to money market funds in general).
Treasury bill vs. mutual fund: Unlike T-bill, an investor can regularly top up the same mutual fund account
As it stands now, it is not allowed to top up an existing T-bill investment with additional funds. For instance, you may have invested GH¢200 in a 91-Day T-bill a month ago and wish to top up the existing GH¢200 with an additional GH¢100 to form a single investment of GH¢300. This would not be possible due to the differences in interest rates and maturity dates. In other words, the initial GH¢200 would be maturing at an earlier date with a different interest rate. As you may be aware, interest rates of T-bills keep changing week by week.
Let’s assume that the GH¢200 you invested a month ago had an interest rate of 18%, maturing on 14th April 2017. Now, interest rate of 91-Day T-bill has dropped to about 15%. Besides, any money invested in a 91-Day T-bill today would be maturing after three months. This makes it difficult to combine the subsequent GH¢100 with the GH¢200 invested earlier on. You may therefore have to invest any new fund (in this case, the GH¢100) separately. Thus, you would be having several T-bill investments for the various additional funds that would be maturing on different dates.
The situation is different for mutual fund accounts since you can top up with any amount at any time. An investor can make a regular contribution to his mutual fund account to suit his needs. A mutual fund may be therefore ideal for investors who choose to consolidate their fixed income investments in a single portfolio.
Treasury bill vs. mutual fund: The yield on mutual funds general exceeds that of T-bills, even though slightly
Historically, the yield on mutual funds appears to be slightly better than that of T-bills. Detailed comparison of historical data of mutual funds and T-bills can be found in the post below:
Performance comparison of mutual funds in Ghana
There are a number of financial institutions that pay higher than the prevailing market rates. These institutions however require a minimum investment amount that outweighs the financial capability of many individual investors. As institutional investors, mutual fund managers are able to raise such minimum bids to earn the attractive rates. This is one of the reasons why mutual funds generally perform better.
Treasury bill vs. mutual fund: Commissions are paid on mutual fund accounts but not on T-bills
Investing in T-bills come with no charges. Authorised dealing institutions are paid commissions by the Bank of Ghana (the originator of T-bills). Thus, the investor pays no further charges. On the other hand, mutual fund investment comes with varying fees and commissions. For details on investment fees and commissions, refer to the post below:
Investment costs in Ghana: Understanding the fees and commissions
Due to the fees and commissions charged on mutual funds, an investor may need to stay invested for a while in order to cover the charges and subsequently earn some reasonable returns. For instance, most mutual funds charge upfront fees of 1% of the invested money. Let’s assume that three investors decide to invest GH¢500 each in one of such funds. The fund manager would therefore charge each investor GH¢5 (that is 1% of GH¢500). Now, out of the three investors, one would like to withdraw his money after just a month. The other two investors decide to stay invested for one year. In effect, since each investor was equally charged GH¢5, the investor who pulls back earlier after just a month appears to be paying more in fees. In other words, he pays a fee of GH¢5 for just a month of investment while the others pay GH¢5 for the whole year.
Treasury bill vs. mutual fund: T-bills are safer
As far as risk is concerned, both T-bills and mutual funds (money market funds) can be considered safe. Nevertheless, T-bills appear to be safer since they are issued by the Government. It is nearly impossible for the Government to run away with investors’ money. However, the same cannot be said of the various private financial institutions that manage the mutual funds.
Treasury bill vs. mutual fund: Mutual funds may require less monitoring and tracking
Since mutual funds are constantly managed by experts, investors may not be required to keep track of matters such as changing trend of interest rates, which short-term instrument to buy, which ones are maturing, which ones must be rolled over, etc. Such monitoring and decisions are taken care of by the mutual fund managers.
T-bill investors, on the other hand, must have dedicated time to keep track of their investments and make the right buying and selling decisions. This is necessary, especially if they have different funds maturing on different dates. Even though some financial institutions send notifications to remind investors of their T-bill maturity dates, many others do not send any notification. T-bill investors would therefore need to keep track of their investments’ maturity dates in order to give any further instructions to their banks.
Treasury bill vs. mutual fund: Payments of interests on T-bills are simpler and well-defined
Since there is no maturity date for mutual funds, investors who wish to use their investment as a regular income source (eg. monthly payments) may always have to fill a withdrawal instruction form on a regular basis. This is however not the case for T-bills whereby the investor is paid the interest in his account upon maturity. T-bill investors need not to fill any additional withdrawal form unless they want to prematurely terminate their investment.
The defined interests on T-bills further make financial planning easier. Before you invest your money in a T-bill, you’re assigned a defined interest rate which does not change until the investment matures. This is beneficial for investors who want to plan ahead precisely.
The yield of mutual funds however changes in line with the prevailing interest rates of fixed income securities. If you’ve had taken a keen look at the annualised yields of mutual funds, you would realise that they fluctuate almost every day. For instance, since the beginning of this year (2017), the annualised yield of Databank Mfund has kept fluctuating between 22% and 20%. A defined annualised yield of mutual funds can only be known at the end of the financial year (31st December). Hence, investors whose planning are based on today’s rate may be slightly disappointed in the course of time.
Again, Treasury bill interests can be discounted, unlike mutual funds. What this means is that the interest calculated on T-bills can be given to investors in advance, even before their invested money matures. Discounted rates are slightly lower than the normal interest rates.
Treasury bill vs. mutual fund: Mutual funds offer investors the opportunity to diversify their fixed income portfolio with smaller amounts
Proper diversification is one of the important characteristics of a prudent investment strategy. Since mutual fund managers invest across varying fixed income securities, investors, by default, have their investments diversified on their behalf. This is irrespective of the amount a mutual fund investor holds. For example, ‘investor A’ who invests GH¢100 will have the same diversification pattern as ‘investor B’ who invests GH¢500. Thus, investors with smaller amounts are equally offered the opportunity to diversify their fixed income portfolio.
On the other hand, most financial institutions demand some minimum amounts for T-bills purchase. For instance, information on Databank’s website shows that a minimum amount of GH¢500 is required for their T-bills purchase. This limitation may restrict low-income investors who wish to diversify. Let’s assume that you have GH¢500 but would like to purchase a variety of short-term securities comprising of 91-Day T-bill, 182-Day T-bill and probably a fixed deposit investment. With the minimum purchasing limit of GH¢500, your GH¢500 could only buy you a single short-term security. In effect, you may not be able to diversify as you had originally intended to.