What to know about investing in federal government savings bond
The Debt Management Office (DMO) opened its latest Federal Government of Nigeria (FGN) savings bond offer on November 6. The DMO is offering two year bonds at a coupon rate of 12.091 percent and three year bonds at a higher coupon rate of 13.091 percent. Coupon rate is the same as the interest that will be paid to investors in the bond. Investors can invest as low as N5,000 while the maximum amount that can be invested is N50 million for those with the higher incomes. The FGN savings is therefore open to all Nigerians irrespective of their income level.
FGN bonds are primarily targeted at retail or individual investors. A key advantage of investing in savings bonds is that it qualifies for exemption under the income tax act. This means that whatever amount you invest in a savings bond is not subject to income tax. So if your monthly salary is say N100,000 and you decide to invest N20,000 in a savings bond, only the balance of N80,000 will be subject to personal income tax.
So let us assume that the personal income tax rate is 20 percent. An investor in an FGN savings bond would only pay N16,000 whereas someone who did not invest in a savings bond will pay N20,000 as tax. The investor in the savings bond would have saved N4,000 on his or her tax bill. This effectively means that investing in an FGN savings bond can actually be used as a tax shield by retail investors.
But there are even more advantages for those that invest in an FGN savings bond beyond the tax savings. FGN savings bond pays interest rate four times in a year. So let us say an investor invests N100,000 in an FGN savings at 13 percent per annum. This means that the investor will be paid N13,000 over the period of his investment. However, the investor will get this amount paid on quarterly basis which will come to an average of N3,250 per quarter. The advantage of quarterly payment of interest rates is that it gives the investor an advantage to reinvest the returns on a quarterly basis. This means that the investor can advantage of the power of compound interest and build his or her wealth at a geometric pace. The magic of compound interest and how it affects your return in investments will be treated next week. The interest payments are paid directly into the investors account and so there are no complications in having access to the returns.
Another major advantage of investing in FGN bonds is that investment can be used as collateral for loans from financial institutions. So where an investor has say N500,000 invested in FGN bonds and he or she needs a quick loan of say N300,000 from the bank. The bank will accept the investment in FGN savings bond as collateral for the loan. This is because of the risk free nature of the investment in FGN savings bond. The borrower can even use part of the earnings from the savings bond to offset the interest or part payment from of the loan collected.
However, where an investor in an FGN savings bond is in need of urgent cash and would not want take a loan, he or she can sell his investment in the FGN savings bond. This is because all FGN savings bonds are listed on the Nigerian Stock Exchange (NSE) making them tradable like ordinary shares. So where an investor in an FGN savings bond needs urgent cash, he or she can easily sell his or her FGN bonds to raise the needed cash.
FGN bonds are relatively easy to buy. The Debt Management Office has accredited several stockbroking firms which are mandated to buy FGN savings bonds on behalf of interested investors. This means that all you need to buy an FGN savings bond is to call an accredited stock broker and place an order. List of accredited stockbroking firms can be found on the website of the Nigerian stock exchange.
FGN savings bonds are issued on a monthly basis. Announcements of new issues are usually made through the media. The advantage of the having a monthly issue is that an investor can easily set aside a portion of his or her monthly salary towards the purchase of the bonds. The bonds do not attract any subscription charges. Offer period for the bond is usually five days. So, if the offer opens on a Monday, it would close on a Friday. There are no extensions to offer periods and so once an offer opens, investors must ensure that they place a buy order within the offer period and that their accounts are funded for the offer.
At the close of the offer period, successful bidders Central Clearing Security Systems (CSCS) account will be credited with whatever amount they have been allotted and they will also receive a text message letting them know that they have been successful with the investment in the FGN savings bond issue for that particular month.
FGN savings bond present a great way for retail investors to save for their future especially for young adults who want save towards specific goals in their life like marriage, children school fees or even building a house of their own or retirement. It is more attractive than putting money in a savings account because of the higher interest rate it offers. This is also a good time to buy into FGN savings bond because the outlook is that interest rates are going to fall. It may therefore be wise to buy now that the interest rates on offer are relative high.