Modupe Gbadeyanka
By FSDH Research
Have you ever considered how much money you could create from that your little N5,000? And most times, a lot of people blow it off, by spending it on frivolities. An adage says ‘a little drop of water makes a mighty ocean’.
The Federal Government of Nigeria Savings Bond (FGNSB), just like a mutual fund, is an instrument the FGN uses to mobilize savings from low income earners for developmental purposes.
In return for investing money in the FGNSB, the FGN, through the Debt Management Office (DMO), pays interest (coupon) to the investor every 3 months.
In our previous report entitled ‘Policies to Increase National Disposable Income’, we noted that there is low savings in Nigeria compared with some other countries.
The culture of low savings is one of the reasons why the interest rate on loans is high in Nigeria. In order to increase national savings, more people need to be encouraged to save their money in addition to providing an enabling environment to create jobs so that more people can earn income from which they can save and invest.
Before the FGN introduced the Savings Bond in March 2017, the government had two major securities to borrow money from the Nigerian public: FGN Bonds and Nigerian Treasury Bills (NTBs).
The minimum amount required to invest in these two securities is now significantly higher than what most low-income earners can afford.
However, with the introduction of the FGNSB, which requires a minimum investment of N5,000, more people are able to invest part of their income and earn returns from it.
Although the FGNSB is listed on the Nigerian Stock Exchange (NSE), allowing investors who need money before maturity to sell and receive cash, it is not actively traded on the NSE.
Therefore, mutual funds might be more attractive because investors may turn their investments into cash more easily than the FGNSB.
The DMO, on behalf of the FGN, issues the FGNSB on the first week of every month and it is open for 5 working days. In order to buy the FGNSB, the investor must approach a DMO-licensed stockbroker to act on his or her behalf.
The Savings Bond has the full support of the FGN and, as a result, returns are always paid regardless of the state of the economy.
Due to this, the FGNSB is one of the few types of financial investments in Nigeria that has minimal risk. This further shows that the FGNSB is a very good investment opportunity for low-income earners who do not want to expose their investment to excessive risk.
In addition, the FGNSB is also exempted from payment of all forms of taxes.
There are two different kinds of FGNSB: the one that takes 2 years before the principal is paid back to investors (known as the 2-year FGNSB) and the one that takes 3 years before the principal is paid back to investors (known as the 3-year FGNSB).
Fixed interests are paid once every 3 months (quarterly). Thus, for a 2-year FGNSB, interest is paid 8 times while interest is paid 12 times for a 3-year FGNSB. The average interest rates (coupon rates) on the 2-year and 3-year FGNSB are 11.20% and 12.20% respectively since inception, which are both higher than the savings account interest rate which is 4.13%.
Investment in FGNSB is another way to make your money work for you 24 hours a day non-stop, just the same way your investment in a mutual fund, which is managed by a professional fund manager, works for you 24 hours a day non-stop.
Our illustration shows that an investment of N100,000 in the FGNSB could grow to N1,582,382.48 in 25 years. This is possible if the interest earned and the maturing principal are reinvested at an interest rate of 11.20% annually payable every quarter.
