RecessionInNigeria: Idle Funds in Bank Fixed-Deposit – Not a Smart Option

Proshare

Friday, October 21, 2016 3.38 PM Ologbon-ori Taiwo

Idle funds are '’funds that are not deposited in an interest bearing or investment tracking vehicle, that is, not participating in the economic markets. These funds are often thought of as "wasted" funds, since they do not appreciate in any manner". Naturally, people feel cool with accumulated savings in a bank-account without considering that it would be much better if such idle cash brings in extra passive income- And when they consider investing the idle fund, Fixed-Deposit Account remains the most common investment option patronised- this is a safe investment income but not fantastically good during recession.

The current depressing state of economy is making more people to seek specific financial counsel and information to improve their finances. Recently, my big brother sought my professional counsel on how he can passively grow his savings- this came after an intense discussion we had previously on how inflation is going to deplete purchase power of salary earners in the cities during this recession.

During discussion, he was curious to know why i was particular about cities. And i was able to convince him that the prices of Gari, Pepper and palm-oil in the village are unchanged as we speak but in the cities, prices of these essentials are growing perpetually.

Front this discussion, he was able to realise and digest the adverse effect of inflation currently at 17.5% on his savings account, which he constantly drops minimum of 250k monthly as savings. I also made him realise the damage savings account would do to his idle cash and disadvantages of Fixed Deposit Account as well.

At this point, he was seriously curious to know how he can preserve and grow the cash without losing a dime to anything or anybody. He does not want stock, based on his sad experience 8yrs ago. In his words, 'don’t make me lose money again as you did 8yrs ago, 'make no mistake, stock is not an option this time'.

In addition to this, we have been receiving average of 10 enquiries from our subscribers since Monday on same subject matter, asking for safe investments to preserve and grow idle funds- these have inspired this article as a follow up to our last article on recession titled
5ways to preserve savings in a recession. In this expanded version, focus is on all idle funds in any form not just savings or cash in savings accounts.

According to Investopedia, Idle fund simply means "Money that is not invested and, therefore, earning no interest or investment income." it goes further to describe idle as 'funds that are not deposited in an interest bearing or investment tracking vehicle, that is, not participating in the economic markets. These funds are often thought of as "wasted" funds, since they do not appreciate in any manner".

If we put the projected inflation figure into consideration, it makes no sense at the moment to put money outside economic activities. Naturally, people feel cool with accumulating savings in a bank-account without considering that it would be much better if such idle cash brings in extra passive income- And when they consider investing the idle fund, fixed-deposit account remains the most common investment option patronised- this is a safe investment income but not fantastically good when compare the income with returns from other investment options.

Here are negative sides of Fixed-Deposits
        
The downside of fixed-deposit is that you cannot touch your money until maturity date
         If you need your funds back due to some emergencies before maturity date, it will attract penalty charges
         Interest for shorter periods are always rip-offs , say 45 or 60 days, the interest rates offered by banks are not impressive
         Nigerian banks would not allow amount Less than N500k in Fixed Deposit
         Other investment vehicle would accept below N500k


In considering other investment options for idle funds, mutual-funds is one of the good investment options during recession, if you really want your idle cash to make money for you. Please do not consider equity based mutual-funds at all. Fixed-income funds, money market funds and balanced funds are goods options to consider. i will recommend balanced mutual funds in particular because is less volatile among its peers.

Some Positives of Mutual Benefits over Fixed Deposit
1.       Good for a short duration if you cannot afford long-term investment horizon.
2.      It provides a stable or guaranteed return according to prevailing interest rate in the economy.
3.      You can exit or redeem your stake in mutual fund anytime on your request
4.      Apart from stable and guaranteed income, mutual funds pay regular dividend
5.       With exception to equity-based Mutual funds, Money-market mutual funds, balanced Mutual funds and fixed-income mutual funds are less volatile and safe to invest. Follow this link to see the performance of mutual funds so far in the year.
https://www.proshareng.com/news/Investments/-RecessionInNigeria-and-Type-of-Mutual-Funds-to-consider/32533

It is important to reiterate that equity-based mutual funds are not good options during recession, kindly avoid this avoidable pitfall.

In our next follow-up article, we shall be considering some of the good investments options/alternatives for idle funds in informal sector. From our field research report, these are good ventures with less entry barriers. They are low-risk with high returns ventures. We consider this as best path to stimulate this out recession. Moving money from one account to another is really not helping this economy.

While we would appreciate your feedbacks, we would also like to encourage you to share your experience with us on your survival moves, options taken and what more you would like to know.

Kindly send in your personal stories, views and comments to
market@proshareng.com and securities@proshareng.com

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