Cash flow is an important part of every business. Individuals also maintain a set amount of cash for daily and emergency use. But having too much cash on hand is counter-productive, hence the need to consider investing in financial securities. If you have ever wondered how you can start to invest in government securities, then this article is for you.
There are several types of financial securities to consider investing your extra cash in. however, whichever you choose depends on the type of extra cash you have available. Called idle cash reserves, this money can be set aside for short-term or long-term use. The latter is more suitable for investing in government securities such as bonds and treasury bills.
What Are Government securities?
Kenya, like any other government, is obliged to outsource funds to finance its projects and other operations.
One of the most common ways is through borrowing. This can either be external debt or internal debt.
Bonds make up their internal borrowing.
Government securities are debt management obligations of the Kenyan government that individuals and organizations can invest in.
Simply put, when you invest in government securities, you lend the government money for a set period.
Types of Government Securities
There are two types of government securities you can invest in, both issued by the Central Bank of Kenya.
1. Treasury Bills
These are short-term debt obligations. They have maturity dates of 3 to 12 months.
The minimum capital required to start is Ksh 100,000.
2. Treasury Bonds
These are long-term debt obligations. They have maturity dates of 2-30 years. The minimum investment is Ksh 50,000 for regular bonds and Ksh 100,000 for infrastructure bonds.
In other words, treasury bonds are a secure, medium to long-term investment that offers you interest payments every six months throughout the bond’s maturity.
Why invest in government securities
Wondering why you should invest in government securities? Here are four reasons why these financial instruments are favored by expert investors.
1. Higher interest rates
Most Treasury Bonds fetch interest rates between 10-13 percent depending on maturity dates and market conditions.
This is significantly higher compared to bank savings and fixed deposit accounts.
This is also higher than what Money Market Funds offer, as MMFs have interest rates of 7-10 percent.
This makes treasury bonds attractive to investors as they fetch higher returns than other asset classes.
2. Almost guaranteed returns
The Kenyan Government has no history of loan defaults. This means that it has always met its debt obligations in the past.
As a result, this makes investing in government securities less risky compared to investing in any other asset class.
3. Regular returns
Bonds carry semi-annual interest payments; hence investors receive returns every six months.
Hence an investor who has invested in a couple of bonds can receive interest payments almost every month of the year and boost his cash flows.
4. Infrastructure bonds are tax-free
Infrastructure bonds are debt obligations used mainly by the government to finance infrastructure projects.
They often have long-term maturity dates of 20-30 years and are tax-free.
This means that the returns from infrastructure bonds are exempted from the 15 percent withholding tax that is subjected to other bonds.
How to invest in government securities
But how do you invest in Kenya’s government securities?
1. Directly via the Central Bank of Kenya
This way, you have to visit the CBK main offices or their branches in Mombasa, Kisumu, Nyeri, Eldoret, and Nakuru. You then have to open a CDS account by collecting the application documents, filling them in, and submitting other relevant documents.
You will also activate the mobile CBK TMD service that allows you to buy bonds from your phone via their USSD code *866#
This is the hardest but the best way. Even though you will spend a lot of time going to CBK offices and your bank to get the documents stamped and verified, you will also cut down on your investment costs as third parties charge for the service.
2. As a nominee
Third parties like commercial banks, investment banks, and other registered brokers can open a CDS account on behalf of their clients and help them invest in bonds and charge a small fee.
The good thing, despite the cost, is that you can sell or buy bonds in the secondary market with a third party. That means if you buy a 20-year bond and need your money in the 10th year, you can quickly sell your bond to a willing buyer in the secondary market.
How do you make money in bonds?
Most bonds in Kenya have fixed coupon rates. This means that the interest rate determined at the bond auction is locked until maturity.
Investors purchase a certain amount and then receive a percentage of that amount every six months throughout the bond’s maturity.
Once the bond matures, the investor receives a final interest payment and initial investment.
For example, if you invested Ksh 100,000 in a ten-year bond with a coupon rate of 12 percent per annum,
Every six months, you will receive Ksh 6,000.
Then at the end of the ten years, you get your initial investment back.
For bonds with a tenor of below ten years, a withholding tax of 15 percent is charged.
Bonds with a tenor of more than ten years are subject to a withholding tax of 10 percent.
Infrastructure bonds are tax-exempt.