Treasury Bills or a Money Market Fund? How to Compare the Returns
Treasury bills lock in a return when you buy, while money market funds move with rates. Here is how to compare them, including the discount-rate trap, with a worked example.
Treasury bills and money market funds both offer low-risk ways to earn a short-term return, but they pay out differently. A bill locks in its yield when you buy it, while a money market fund's yield moves with market rates and is reported after fees. The right choice depends on the yield on offer, how long you plan to hold the money, and how quickly you may need it back. This guide walks through the arithmetic, shows how to compare a discount-rate bill with a fund's net yield, and sets out the trade-offs that matter most for investors in African markets. The figures in the worked examples are illustrative, not current market rates.
Contents
- How a Treasury bill pays
- How a money market fund pays
- A worked example
- Discount rate versus true yield
- A simple decision rule
- Liquidity, taxes and other factors
How a Treasury bill pays
A Treasury bill is a short-term debt security issued by a government. Investors buy it at a price below its face value and receive the full face value at maturity. The difference is the return. Bills are typically issued for 91, 182 or 364 days, though the tenors available vary by country.
The main feature of a bill is that its return is known when you buy it. If you hold to maturity, the return is set by the price you paid, not by where market rates go afterwards. That certainty is the reason bills are often used as a benchmark for low-risk returns.
How a money market fund pays
A money market fund pools investor money and places it in short-term instruments, which can include Treasury bills, bank deposits and commercial paper. The fund reports a yield that reflects the average return on its holdings over a recent period, after deducting its fees. That yield is not fixed. It rises when rates rise and falls when they fall, and the fund's return reflects whatever the market pays on the day.
Money market funds are usually easier to access than bills. Many allow investors to add or withdraw money on most business days. That convenience is part of the reason they are popular with savers and businesses that need flexibility.
A worked example
The simplest way to compare the two is to calculate the return over the period you plan to hold the money. For a simple, non-compounded return, the formula is:
Return = principal × yield × days ÷ 365
Suppose an investor has 10,000,000 in local currency to place for 91 days. If a bill has a yield of 18 percent, the return is 10,000,000 × 0.18 × 91 ÷ 365, which comes to 448,767. If a money market fund has averaged a net yield of 16.5 percent, the return is 10,000,000 × 0.165 × 91 ÷ 365, or 411,370. In this example, the bill earns about 37,397 more over the period.
The result depends entirely on the inputs. If the fund's yield had averaged 18.5 percent, it would have come out ahead. That is why the comparison should use the actual yields on offer when you invest, not the ones from this example.
Discount rate versus true yield
Many bills are quoted as a discount rate rather than a yield. That can make them look more attractive than they are, because the discount rate is calculated on the face value, not the price you pay. To compare a bill with a fund, convert the discount rate to a true yield first.
The price of a bill is:
Price = 100 − (discount rate × days ÷ 365)
The true yield is:
True yield = (100 − price) ÷ price × 365 ÷ days
Take a 91-day bill quoted at a 17 percent discount rate. Its price is 100 − (0.17 × 91 ÷ 365), or about 95.76. Its true yield is then (100 − 95.76) ÷ 95.76 × 365 ÷ 91, or about 17.8 percent. That figure, not the 17 percent discount rate, is the one to compare with a fund's net yield.
A simple decision rule
Once the yields are comparable, the choice follows a few principles. If the fund's yield is expected to stay above the bill's true yield over your holding period, the fund is likely to come out ahead. If rates are expected to fall, a bill protects the return you locked in, while the fund's yield would drop with the market. If rates are expected to rise, the fund reprices upward and the bill keeps its lower return until maturity.
The decision is also a question of timing. A fund is the better choice if the cash may be needed before a bill's maturity date, because the fund can usually be redeemed on short notice. Selling a bill before maturity means relying on the secondary market, which can cost money if prices have moved.
Liquidity, taxes and other factors
Taxes can change the answer. Interest on government bills and fund income may be taxed differently, and the rules vary by country and by product. Withholding tax, minimum investment amounts, fees and access arrangements also differ. Before choosing, check the after-tax, after-fee return, not just the headline yield.
Investors should also consider the institution behind each product. A bill is a claim on the government that issued it. A fund is a pool of assets managed by a company, and its safety depends on the quality of those assets and the manager's controls. Reading the fund's prospectus and recent reports will show what it holds.
This article is general information, not personal financial advice. Confirm current yields, fees and tax treatment with your bank, broker or fund manager before making a decision.
