INVESTMENT; TREASURY BILLS OR FIXED DEPOSIT, WHICH IS BETTER?

Several people tend to be confused on which of the Investment (treasury bills or fixed deposit) to put their money for maximum interest. To answer the above question, while both are very good, ways to invest your money there have similarities and differences.

When you buy treasury bills you are basically lending money to the Government (through Central Bank of Nigeria) with promise to pay back over 91 days, 182 days or 364 days. With fixed deposit however, you are lending to a bank or investment house with a promise to repay you at the expiration of the tenor (usually between one to twelve months). So, if you do not like to lend money to the government then fixed deposit is better.

What is the risk?

Treasury Bills are backed by the full faith and credit of the government and as such they are seen as almost risk free because it is very unlikely that a government can go bankrupt and not able to pay its loans. Beside the government has a tax revenue stream it can use to repay its borrowings.  I have never heard the CBN defaulted.

Fixed deposit is backed by the credit rating of the bank. Unlike when you borrow from the bank, the bank does not give you any collateral when borrow from you. However, it is obligated to pay you your interest and Principal when it falls due. They can however default when it goes bust as we have seen over in the years past. When a bank fails, depositors may lose all or part of their money, including fixed deposits. If you are weary of the risk the Treasury bills is best for you.

Who gives a better interest rate?

The higher the risk the higher the reward is how financial markets play and as such one will expect Treasure bills rate to be lower than fixed deposit rates. However, other factors do come into play that makes it change. Currently, Treasure bills post a better rate than average fixed deposit in Nigeria despite the latter being the riskier of the two.

How do I get paid interest?

Some banks pay you interest at the end of the period along with the principal. Some also pay interest upfront depending on what you negotiate. Interest on Treasury bills are paid upfront only when the principal comes at the end of the Tenor.

Which one pays the most taxes?

Treasury bills are exempted from taxes, so taxes are not deducted from your interest payments. However, you are likely to pay a fee to the bank for rendering the service on your behalf. The fees are very small and almost negligible. Interest on fixed deposit attract withholding tax rate of 10 percent deductible at source by the banks and to be remitted to the relevant tax authority. If you don’t want to be taxed the treasure bills is it.

Can I roll over my investments (interest and principal)?

Fixed deposits can be rolled over by banks. You simply instruct your bank to roll over the interest and principal when its mature giving you the benefit of compounding interest. It’s also a default way of saving and investing all rolled up one. Treasury bills cannot be rolled over by default. Once the investment matures the CBN pays the money straight into your bank account.

If you are therefore looking for investment you can roll over with ease, I suggest you go for fixed deposit.

Can I get my cash anytime I want?

You can get your cash anytime you want with fixed deposits by liquidating your account ahead of its maturity. All you need to do is to tell your bankers or investment house that you wish to cash in on your deposits. They will however pay you interest for the period that the money was with them instead of the full tenor if you had waited till maturity. You may also incur an early withdrawal charge.

Treasury bills on the other hand are not flexible as fixed deposits. If you wish to cash in on your treasury bills ahead of its schedule tenor, you will have to sell the rights to the treasury bills to the bank or to a willing buyer. The buyer will deduct the portion of the interest remaining for the period between when you terminated the investment and when it matures from your principal.

Basically, you can collect your cash in both instances except that it is perhaps faster and easier with banks.

Can I use it as collateral?              

Treasury bills by their nature can be used as collateral to collect loan from a bank.  This is because it is seen as a near risk free as asset by lenders and is also quasi cash.

Fixed deposit can also be used as collateral however the credit rating of the bank that is holding the deposit may affect the strength of it in the eye of another lender. Some banks may not accept fixed deposit in another bank as full collateral because they don’t consider the bank a strong bank.

If you are looking for investment to use your money as cash collateral, then Treasury bills are more suitable.

Have you invested in either treasury bills or fixed deposits?  What is your experience? Send me your comment.