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Three investment principles to note when considering short-term instruments

The challenge of creating a balance between making a decent return on investment and being able to recoup all the funds in the shortest time possible is one of the factors discouraging people who plan to use their money in the not-so-distant future from the investment ecosystem, BusinessDay findings have shown.

Because short term investments often present lower returns than longer-term investments, some potential investors do not bother to invest at all but according to analysts, it is better off investing it in an interest-earning instrument than simply saving the funds.

In seeking a place to invest or save cash for the short term, FBNQuest, the asset management arm of FBN Holdings said investors’ priority should be to get their money back at a particular time.

Research analysts at the investment advisory firm said it is crucial because such investors often need to have the money in a specific time to meet obligations such as a down payment on a house, wedding expenses, children’s tuition, or to meet their budget for a scheduled vacation.

“While you want to keep your money safe, you also want a decent return on your savings. It is unlikely that you will earn as much in a short-term investment as you would in a long-term financial instrument,” FBNQuest said.

According to the Lagos-based investment firm, long term investments usually offer greater returns, but their prices are more volatile than short-term investments. Citing an example using the stocks of a company, it said while a company’s share price may rise multiple folds over several years, it could decline during the next few months.

Read also: FBNQuest outlines four reasons alternative investment is relevant

“You may also face the challenge of finding a buyer for the long-term asset that you have purchased. Short-term investments, however, are often highly liquid, allowing you to cash out quickly should the need arise,” it explained.

It further advised that investors should avoid taking excessive risk in the search for higher returns as high yielding instruments unusually present unacceptable and greater risk. “In some cases, such instruments are disguised as Ponzi schemes or similar arrangements.”

On how to determine a legit short-term instrument, FBNQuest said suitable short-term investments are typically characterized by stability in value, liquidity and low transaction costs.

These features, according to analysts at the firm, means that investors’ money will be safe and accessible when they need to use it, which is a significant reason to have short-term investment.

Investors seeking to invest their money for three years or less can consider the following principles by FBNQuest.

Set a reasonable expectation

According to the investment advisory subsidiary of FBN Holdings, it is important for investors to have an expectation that is reasonable.

This is because “short-term investments typically have lower potential returns than long-term investments.”

Safety over higher return

While investors’ appetite for instruments with high yielding returns are usually more than those with lower earning potentials, analysts at FBNQuest advised that investors planning to tap the short-term investment space should choose the safety of their capital over a higher return to avoid falling victim to Ponzi schemes.

“Focus more on the safety of your investment than the return,” they stressed.

Avoid additional risk

While an additional risk could translate to extra return, short-term investors should not be tempted to increase their risk holdings, according to FBNQuest.

“A little extra return may not be worth the additional risk,” it said.

Meanwhile, FBNQuest Asset Management has an instrument that can give short-term investors a reasonable return. The name of the instrument is FBNQuest Money Market Fund, an instrument that collects a pool of money from many investors to invest in securities like treasury bills, commercial papers, banker’s acceptances and certificates of deposits.

According to the company, the instrument is well suited for and adaptable to any investor type. “The Fund offers attractive returns, safety and liquidity to short term investors. You are better off using the power of a collective investment scheme like this to access higher returns for your investment than what you could earn if you made the same investment by yourself.”

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