How do I invest my Sh2m inheritance in treasury bonds?

My name is Joy. I will soon inherit Sh2 million. I would like to invest in bonds as I hear there is good, tax-free money. However, I don’t know how to go about it. My questions are:

a). Should I invest this money in treasury bills or treasury bonds?

b). How and where do I open the account to invest in either of these?

c). Must I invoice a bank to manage the account or to transfer money to the Central Bank? If I must, do I pay them (bank) a commission every time I am paid interest? How do I manage this account? How much do I pay them?

d). Can the interest be rolled over if it is in bonds to be paid at the end of the year and will the amount rolled over earn interest?

Rhina Namsia, the founder of the Acemt Consulting, a training and consultation company that provides financial planning and investment advisory, says:

A bond, by definition, is a debt instrument whereby a lender gives the government or corporate entity money, and this money is paid back with an interest.

A bill, on the other hand, is the same thing but on a short-term basis. Bonds go for up to 30 years but a bill is only issued at a maximum of 364 days.

Government bonds are also known as treasury bonds and they are issued by the Treasury on behalf of the government. There are different types of bonds but the main active ones in Kenya are two: FXDs (as commonly known) and infrastructure bonds (IFBs).

FXDs are the bonds whose interests earned on them are subject to a withholding tax (WHT). Those that last nine years and below are taxed 15 per cent WHT, while those that take 10 years and above get taxed 10 per cent WHT. 

Infrastructure bonds, on the other hand, are tax-free, meaning the interest earned on them is not subjected to any tax.

Before you invest in treasury bonds or treasury bills, you need to open an investment account. There are two ways to go about this:

(a) Open a custodial account with a local commercial bank or any licensed and registered broker or trading agency in Kenya by the Capital Markets Authority. These agencies are mandated to trade and buy bonds on your behalf using the custodial account that you open with them, or;

Treasury bills

(b) Open an account with the Central Bank of Kenya (CBK). Currently, you open the account also known as the DhowCSD account which is available on the CBK website. You can also download the app. Key in your details and create your profile, and then you can trade directly from the app or the web portal of the Dhow account.

It’s good to note that when trading or buying a bond via a custodial account, they will charge you a commission and/or fee. It all depends on the agent you pick. After all, they are doing the job on your behalf. You can find all licensed brokers or agents on the CBK and CMA websites. When trading directly from the Dhow platform, you are not charged anything.

Now, there are two ways to buy a government bond: via a secondary market or a primary market. Primary market is where the government issues bonds every month and they are posted on the CBK website for bidding. Treasury bills are also issued every week and posted on the website too. You can only buy on the primary market what has been issued out by the government and when issued.

A secondary market is the market where traders meet to buy and sell bonds amongst each other. Here you buy via the agents and commercial banks; not from the government but from investors holding bonds but want to sell them out. 

Here, you can buy bonds any day of the week Monday to Friday except holidays. You must have a custodial account to buy on the secondary market because you’re not dealing with the government directly in this case.

Having understood all those basics, you can now decide whether to invest your Sh2 million directly or through an agent. The interest you find declared on bonds and bills is always fixed the entire time you’re holding the bonds as an investor. The interests are paid to your bank account, which you gave while registering your CDS account, every six months.

Secondary market

This means that the government pays coupons semi-annually and, yes, the interest plus the principle can be rolled over to buy more bonds and bills. This is a detail you include during registration when registering on the Dhow CSD or with the broker or agent.

Treasury bills can only be bought on the secondary market and they have a tenure of 90, 181 and 364 days. They are auctioned every Thursday of the week.

To process payments, when trading in the primary market, once you bid on the Dhow platform, CBK will send you a message with details of payment known as reference key and the payment amounts you do. No need to pay the bank to do this. 

All you need to do is to ensure your Sh2 million is in the bank account, walk to the bank with the details from the CBK and do an RTGS transfer to CBK. The banks will always help you with this. There are currently no M-Pesa payments. The same is done for Treasury Bills.

As for the secondary market or dealing with custodial accounts, you will be given their bank details where you deposit money into their accounts and they carry on the trade on your behalf with those funds. Just ensure you’re dealing with a licensed and registered trader, broker or commercial bank.

It is always advisable to practise the compounding effect which is basically rolling over interests earned for better overall returns.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered on this column