Eurobond vs Dollar Mutual Fund

Good morning and how are you doing?

It's Friyay!!! What are your plans for the weekend? 

Friday newsletters are dedicated to personal finance questions from our community. Do you have a burning question? Please feel free to share with us. You can send a DM to any of our social media handles. You can also send an email to [email protected]

Question:

Where can I invest ?50,0000 to get reasonable returns in 6 months? – JK

Answer:

Hi JK,

You left out a few details that would have helped to give you a clear-cut suggestion. What is your definition of a reasonable return? 

A good marker for that is inflation. As of November 2020, inflation rate in Nigeria was 14.89% year on year. So, a reasonable return should either above the inflation rate or at par with it. The asset classes that would deliver that kind of return are in the medium- to high-risk category. They include stocks and crowdfunding. 

You also did not state if the money involved is for investing, or for a short term need such as school fees or house rent. For essential expenses like those, your best bet is a low-risk investment. Low-risk investments have a relatively low return, but come with a higher level of safety. 

Question:

What kind of investment should I make if I want to take advantage of compound interest?

– Dejo

Answer:

Hi Dejo,

Compounding simply means reinvesting your returns. While the term is largely associated with investments that have a fixed or predictable return such as a mutual fund or savings account, you can compound returns on a variety of assets. If you choose to reinvest the dividends you earn on stocks, then you are practicing compounding. 

Question:

What are the risks involved in investing in either a Eurobond or a dollar mutual fund?

– Omo

Answer:

Dear Omo,

An Eurobond is a bond issued and traded outside of the country whose currency is used. If XYZ bank based in Nigeria decides to issue a bond denominated in dollars, then it has issued a Eurobond. Countries also issue Eurobonds. Nigeria has a couple of Eurobonds. 

A dollar mutual fund invests in various dollar debt instruments including Eurobonds. So what are the risks involved? The borrower could end up in a position in which they are unable to meet its interest payments as scheduled. This is known as a default. They could then decide to either reschedule payments or seek debt forgiveness. This will ultimately affect the value of the Eurobond and a dollar mutual fund invested in it. 

Defaulting, however, is usually the last option for many issuers. An issuer is a company or country that has borrowed money. 

It's about 8 days to the end of the month. Are you making wrong money moves? You still have about 11 months to change that. If you would like to do so, our community would be a great fit for you. You can sign up here. It costs N20,000 and you get access for a whole 12 months. What will beat that?

We go the extra mile and you'd be glad you joined us.

If you have any questions, please feel free to send a DM on any of our social media handles or an email to [email protected] 

Enjoy your day??