If you have read our article on Money Market Funds (MMFs) and might still have some lingering questions, this article is for you. Let us look at some of the most frequently asked questions about MMFs, especially in the Kenyan market.
1. What are money market funds?
A Money Market Fund is a type of mutual fund designed for low-risk investing. It focuses on highly liquid, short-term instruments like Treasury bills, commercial paper, and certificates of deposit. These funds aim to provide investors with a safe place to invest easily accessible cash while earning a modest return. Because they invest in stable, short-term assets, Money Market Funds offer a balance of safety, liquidity, and a predictable, if modest, return on investment.
2. What are the pros of investing in a money market fund?
Money Market Funds are highly liquid, allowing you to access your money within 2-5 days. They are also very low risk, as they invest in stable, low-risk assets, ensuring your capital is preserved.
With a low barrier to entry, you can start investing with as little as KES 100, and most funds require between KES 1,000 and KES 5,000. These funds also provide access to assets like Treasury bills and bonds, which are typically out of reach for individual investors.
Additionally, Money Market Funds offer better returns than regular savings accounts, with average annual returns of around 7-10%. This makes them a solid hedge against inflation, helping your money grow steadily.
3. Why do investors prefer money market funds?
Investors favour Money Market Funds for several practical reasons. First, they are an ideal place to build an emergency fund, offering both safety and quick access to cash when needed. Additionally, these funds are a great way to accumulate savings for larger investments, such as real estate, buying land, or entering the stock market.
Money Market Funds also work well for short-term financial goals. Whether you’re saving for a wedding, planning a holiday, or setting aside money for school fees, these funds provide a secure and low-risk way to grow your money until it’s time to spend it.
4. Can I lose my money in a money market fund?
Generally, no. Money Market Funds are designed to be safe.
These funds are managed by a Fund Manager who follows strict investment guidelines. A Trustee ensures your interests are protected. A custodian, usually a bank, holds the funds securely. The Capital Markets Authority regulates everything, adding another layer of safety.
Money Market Funds invest in low-risk, highly liquid assets like Treasury bonds, Treasury bills, and bank deposits. Because of this, the risk of losing money is very low.
However, low risk doesn’t mean no risk. In extreme cases, like mismanagement or a government default, losses can happen. But these scenarios are rare.
5. Is the Management fee charged on the principal amount or the interest earned?
Most fund managers charge a 2% management fee for money invested in a Money Market Fund. This fee is deducted from the interest earned, not from your principal amount. So, your original investment stays untouched. The fee only applies to the returns generated by the fund.
6. How much interest will my money earn in a money market fund?
The interest in a Money Market Fund usually aligns with the returns from short-term Treasury bills (T-bills). These T-bills are typically the largest component of a Money Market Fund’s portfolio, making them a key driver of the fund’s overall return. Because T-bills are low-risk and backed by the government, they offer a stable benchmark for calculating returns.
As a result, the interest you earn from a Money Market Fund should closely mirror the performance of these short-term T-bills. However, the exact rate can vary depending on market conditions and the specific assets within the fund. While Money Market Funds aim to provide consistent returns, it’s important to remember that they are still subject to market fluctuations. This means that while your money is relatively safe, the interest rate may adjust over time based on the performance of the underlying assets.
7. If I invest KES 100K today, how will my money grow throughout the year?
Let’s break it down. Imagine you invest KES 100,000 in a Money Market Fund and leave it untouched for a year.
Your investment will earn interest daily, which gets added to your balance. This means your money grows over time through compound interest. Each day, you earn interest not just on your original KES 100K but also on the interest already earned.
The growth depends on the fund’s annual interest rate, which typically mirrors short-term Treasury bills. Without withdrawals and top-ups, here’s how your investment would grow on an 11.8% return rate.
| Money Market Implied Yield on a 12 months Time Horizon | ||||
| Investment Amount: KES 100,000 Indicative Return Rate: 11.8% | Investment Period: 12 months | |||
| Principal | Interest | Withholding tax | Total | |
| Month 1 | 100,00 | 973 | 146 | 100,827 |
| Month 2 | 100,827 | 981 | 147 | 101,660 |
| Month 3 | 101,660 | 989 | 148 | 102,501 |
| Month 4 | 102,501 | 997 | 150 | 103,348 |
| Month 5 | 103,348 | 1,005 | 151 | 104,202 |
| Month 6 | 104,202 | 1,013 | 152 | 105,064 |
| Month 7 | 105,064 | 1,022 | 153 | 106,932 |
| Month 8 | 105,932 | 1,030 | 155 | 106,808 |
| Month 9 | 106,808 | 1,039 | 156 | 107,691 |
| Month 10 | 107,691 | 1,047 | 157 | 108,581 |
| Month 11 | 108,581 | 1,056 | 158 | 109,478 |
| Month 12 | 109,478 | 1,065 | 180 | 110,383 |
| TOTAL | 12,215.83 | 1832.37 | 110,383 | |
*It is important to note that the return on a Money Market Fund is indicative. It depends on the performance of underlying money market securities, which can be affected by market volatility. Past performance often forms the basis for the indicative rate but does not guarantee future results. While Money Market Funds aim for stability, returns can fluctuate based on market conditions.
If you want a clearer picture of how your investment can grow over time, considering different conditions like deposit amount, interest rate, and holding period, try using our Money Market Returns Calculator. It’s a handy tool to help you see how various factors can impact your returns.
8. What’s the best use of a money market fund?
Money Market Funds are ideal for savings. Instead of keeping your money in a regular bank account, a Money Market Fund offers a better alternative. Here, your money earns a decent interest rate that often stays ahead of inflation.
The primary goal of a Money Market Fund is capital preservation. This makes it a safe place to park your money while earning returns. Whether you’re saving for a short-term goal or just want a secure place to grow your funds, a Money Market Fund is a smart choice.
9. What do I need to join a money market fund?
Joining a Money Market Fund is straightforward. You’ll need to provide some basic KYC (Know Your Customer) documents, which include:
- Your ID card or passport
- Your KRA PIN
- Proof of bank account (a front photo of your ATM card, a bank statement, or a letter of bank account confirmation)
- A passport-sized photo
With these documents ready, you can easily complete the application process and start investing in a Money Market Fund.
10. Which is the best money market fund to join?
I recommend two reliable Money Market Funds that are easy to join:
- Kuza Money Market Fund
With a minimum investment amount of KES 5,000 and a top-up of KES 1,000, Kuza MMF offers an affordable and accessible option. Sign up for Kuza MMF here.
- CIC Money Market Fund
CIC MMF has a proven performance record and offers an affordable option with a minimum investment amount of KES 5,000 and a top-up of KES 1,000. Sign up for CIC MMF here.
These funds offer low barriers to entry and solid returns, making them great options for both new and seasoned investors. For an in-depth analysis of Kenyan MMFs check out our article on How Kenya’s top MMFs compare.