In our journey toward financial independence, we need a secure investment vehicle. Which will shelter us from the storms of our daily lives, whether in the form of an emergency fund or short-term goals.
Money market funds offer such, but are they really what you need?
Money Market Funds Explained
1.1 What are Money Market Funds?
Money Market funds are mutual funds—a pool of funds from investors managed by professionals on their behalf.
1.2 How Do Money Market Funds Work?
A large company like a pension or insurance firm collects money from people and uses it to invest in things like fixed deposits, treasury bills, and bonds.
Because of the stable nature of these underlying assets, the investor can get a consistent and low-risk return on their invested capital.
And at the same time have access in case of an emergency without their invested capital getting a hit.
1.3 Types of Market Funds in Kenya
There are a variety of market funds and their underlying asset identifies these. These include: -
Money Market Fund
Ideal for risk-averse investors as they offer: - Stability, High liquidity, and a Low-risk return. Best suited for holding your emergency and sinking funds.
A Sinking fund is money allocated for your upcoming expenses such as school fees, birthday parties, weddings, anniversaries, etc.
Equity Market Fund
Ideal for enterprising and risky investors. The funds are invested in equities and thus classified as a high-risk, high-return investment.
The returns fluctuate as they depend on performance of individual stocks invested in.
Bond Market Fund
Ideal for investors looking for a consistent return on their investment. Government or corporate bonds comprise a larger part of their portfolio. The rates are predetermined; thus, you’re aware of what to expect in terms of returns.
Balanced Market Fund
This encompasses investment in both bonds and equities. Which offers a fairly stable return as it’s anchored on both equities and bonds.
What Are The Benefits of Investing in Money Market Funds?
2.1 Safety and Security
Money market funds offer a safe return on your capital. Better than a bank saving return and slightly above the inflation rate.
2.2 Liquidity and Accessibility
Capital is easily available in case of an emergency or you achieve the goal you were aiming for. Funds are accessible within three working days, either through Mpesa or through a linked bank account.
2.3Attractive Returns with Low Risk
Money market funds offer a stable return on your capital anchored on weekly returns of treasury bills. This offers you an opportunity to save up for major expenses without losing the value of your money, as the returns are above inflation.
2.4 Diversification Opportunities
Fund managers invest in diverse asset classes such as bank deposits, treasury bills, commercial papers, Treasury bonds, etc.
This reduces the amount of risk they’d bear by investing in a single asset class.
What Money Market Funds Are Not
Money market funds are not get-rich-quick schemes. It takes focus, discipline, and consistency to achieve meaningful results.
Money market funds offer a consistent return that compounds over time. The return is compounded daily or monthly, depending on your provider.
For example: starting with an investment capital of Ksh 30,000 and adding Kshs 5,000 monthly in 10 years, it turns out to Ksh 1,105,436.14 against a contribution of Ksh 630,000. This assumes a 10% return per annum.
The bigger your numbers, the better it gets. Get the snowball rolling.
Summed up in the words of the brilliant genius, Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
How To Choose The Right Money Market Fund For You
Which is the right money market fund for you? The right fund should marry your investment goals.
Are you looking for a safe place to park your money for a short period, or are you looking for a higher return?
Do Your Homework.
A good money market fund will provide you with a facts sheet. This outlines your investment return, management fees, and target group for each fund.
Do a comparison to see how your objectives fit in before making a decision. They should also be able to provide you with a monthly statement of your holdings.
CMA Regulated
Choose a fund whose fund manager is listed and regulated by the Capital Markets Authority(CMA). This will help ensure that your money is safe and in case of dispute resolution.
Here are some of the best money market funds in Kenya:
CIC Money Market Fund
Zimele Money Market Fund
Britam Money Market Fund
Icea Lion Money Market Fund
NCBA Money Market Fund
These funds offer a good balance between safety and returns. They CMA compliant and offer different minimum investment capital depending on the depth of your pockets.
3.1 Evaluating Fund Objectives and Strategies
Different market funds have different target groups. This entirely depends on your investment goals, investment horizon, and expected returns.
Check their fact sheets to shine light upon your investment path. Returns, fees, charges.
Fund Management and Reputation
Risks and Considerations
4.1 Interest Rate Risk
Money market funds offer a low return on your capital since they are cash like investment schemes. Therefore, be on the lookout for funds that offer outlier interest rates compared to the market average.
4.2 Inflation Risk
Your money market fund should offer a reasonable rate of return.
A match for the weekly treasury bill returns and above the inflation rate, otherwise it wouldn’t make sense keeping your money in them.
4.3 Regulatory and Market Risks
Ensure your fund manager is authority compliant and has a facts sheet on what they invest your money in and their average rate of return. They should also email you your statement monthly.
How to Invest in Money Market Funds in Kenya
Select a reputable fund manager based on their market share, regulation compliance, and ease of access. There is a reason as to why they control a reasonable chunk of total market share.
How long have they been in business? We don’t want to invest in a company and live worrying about them closing business tomorrow.
Opening an Investment Account
With most fund managers, you can create an account online and upload your KYC documents. Or at the very least, email them the required documents.
And after 24 to 72 hours, you should have your account ready.
Funding Your Investment
You can fund your account through direct deposits, or using their Mpesa paybill. Remember to indicate the member number in your deposit slip.
Monitoring and Managing Your Investment
After funding your account, all that’s left is for you to make regular deposits and watch your money grow.
Your fund manager will mail you a monthly statement detailing your investment, and interest earned.
Taxation and Legal Aspects
Money market investments attract a 15% withholding tax on interest. This tax is final and therefore filed by your fund manager. There is no action required in your end.
Frequently Asked Questions (FAQs)
7.1 What is the Minimum Investment Amount?
Different money market funds have different minimum requirements. For Example, CIC Money Market Fund requires a minimum of Ksh 5,000 while Zimele Money Market Fund requires a minimum of Ksh 100 to get started. Therefore, check with your fund manager to know their minimum requirements.
7.2 Can I Withdraw My Funds Anytime?
Yes. Money Market funds are cash like investments, therefore can be withdrawn at any time. However, for some funds, it takes 2 to 3 business days to avail the cash in your bank account.
Others offer instant withdrawals to your Mpesa account. Therefore, do your homework and choose the one that suits your needs.
7.3 How Are Money Market Funds Regulated in Kenya?
The Capital Markets Authority provides the general framework for investment services in Kenya. They provide that a Fund manager must have a custodian and a trustee to protect the interests of investors.
Trustee ensures funds are managed in the interests of investors.
Custodian Services secure and manage securities owned by your fund manager.
7.4 Are Money Market Funds Suitable for Long-Term Goals?
No. For long-term investment goals, consider stocks, bonds and other investment vehicles as they provide a better return on your capital.
In Conclusion
Money market funds provide a high interest savings account that beats bank rates. Therefore, they are a good place to park cash intended for short-term goals.
Only you can really choose the right Money Market Fund for yourself. Choose the one that suits your needs at this point in life.
However, do your due diligence before pulling the trigger. Here is a checklist to help you out.
Market share. Do they control a reasonable chunk of the market?
Trustee and Custodian. Who offers trustee and custodial services for your fund manager? Are they trustworthy?
Are they CMA compliant?
What are the minimum deposit requirements?
How fast can you access your money in case of an emergency?
etc
Happy Investing.
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