Finance and Investment

Mutual Fund vs Treasury Bill: Which One is a Better Investment?

If you are here, you’re probably wondering whether to invest in treasury bill or mutual fund. Both are popular investment instruments on the financial market.

When it comes to investment decisions, seasoned investors as well as potential investors always focus on the reward while taking note of the likelihood of downturns.

There is no absolute guarantee of return on any form on investment, so the guiding principles are always about investment security, risk, diversification, investment management and so on.

This write-up looks at mutual funds (used as money market funds in general) and treasury bills, as a guide to help you choose the investment instrument that meets your financial needs.

1. Interest yield on investments

Based on historical data, the yield on mutual fund is known to be slightly better than that of treasury bills.

Although a number of financial institutions require a minimum investment lump sum, the interest payments are usually higher than prevailing market rates.

But this is more so for instructional investors, as mutual fund managers are able to pool such minimum bids to get the attractive rates.

So if you are an individual in that pool, you stand to benefit from the strength of institutional investors. That’s why among many reasons, mutual funds tend to perform better than treasury bills.

2. Top-up your investments.

A treasury bill investor cannot top up an existing T-bill investment with additional funds. For example, if your invested GH¢500 in 91-Day T-bill a month ago, it wouldn’t be possible to top up the existing investment with additional funds today.

This is because of the differences in interest rates and maturity dates. Interest rates of T-bills are issued week by week, so the rate for a 91-Day bill a month ago, may not be the same next week.

Nonetheless, you can invest in multiply treasury bill accounts as you wish. Instead of topping up, you can use the money to buy new T-bills at a different rate and maturity date.

However, with mutual fund accounts, you can make regular contribution to fund at any time you feel comfortable to invest.  

This makes mutual fund an ideal investment for people who want to consolidate their fixed income investments in a single portfolio.

3. Investment Security

You might say that MFund is managed by financial experts so it is in good hands. However, when it comes to risk, and security of your investments, treasury bills appears safer than MFund.

Treasury bills are issued by the Central Bank and back by the Government, making it risk-free, unless government collapses or runaway with your money.

On the contrary, it is not too much to say that private investment institutions can collapse or abscond with your money.

4. Commissions charges

Investing in Mutual funds comes with fees, while investing in treasury bills come with no applicable charges.

For treasury bills, the authorized financial institutions receive commissions from the central bank; hence investors do not pay any investment charges.

Mutual fund investment has fees and commissions. Usually, mutual funds attracts an upfront fee of about 1% of the amount invested. 

So, to get the most of your money, an investor may need to stay invested for a while (usually 90days or more) in order to recover the charges and subsequently earn some reasonable returns.

5. Monitoring and tracking of Investments.

Mutual funds are managed by professionals and investment experts. They do all the hard work on investing in the right securities, worrying about monetary policies, etc.

So if you invest in mutual funds, you don’t need to necessarily keep track of your money. Such ‘burden’ and decision are handled by the mutual fund managers.

On the other hand, investors in treasury bill have a cause to worry, and that is especially so if they have different funds maturing on different dates. They have to time the market to make the right buying and selling decisions, which T-bill to roll over etc.

This requires constant monitoring and tracking time for the investments’ maturity dates, so I to take a timely financial decision.

6. Interest payments

The interests you earn on treasury bill is defined and known even before your money matures. For instance, if the prevailing rate for a 91day T-bill is 22.20%, you will receive the exact percentage on your investments at maturity.

You also have the option to discount your investment before the 91days, but a rate lower than the normal rate.

Usually, you wouldn’t have to fill any T-bill withdrawal form unless you want to prematurely terminate their investment.

On the contrary, there is no maturity date for mutual funds, and investors have to always fill withdrawal and indemnity forms before they can redeem their investments.

Unlike T-bill that has a fixed interest rate, the yield on mutual fund changes along the prevailing interest rates of fixed income securities.

7. Investment Diversification

A good diversification of investments is key to reducing risk and reaping higher returns; and mutual fund offers you that opportunity.

Mutual fund managers invest across different fixed income securities on behalf of investors, irrespective of their contribution to the pool.

For instance, ‘investor A’ who invests GH¢200 will have the same diversification pattern as ‘investor B’ who invests GH¢400. Thus, investors with smaller contributions are offered the opportunity to diversify their fixed income portfolio.

Most financial institutions ask for minimum amounts for T-bills purchase. For instance, whiles you can buy Ecobank T-bill with as low as Gh¢5, you need a minimum of Gh¢100 for Cal Bank T-bills.

Investment in T-bills is for a single short-term security, and investors who wish to diversify their holding to stocks, fixed deposits etc. would not be able to do so.

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