One of the asset classes crucial in wealth generation and protection is a Money Market Fund (MMF). In this series, we will dive into the depths of money market funds, discuss how they operate, analyse the different money market funds in the Kenyan market, and how you can use them as part of your wealth creation strategy.
What is a Money Market Fund?
A Money Market Fund (MMF) is a low-risk investment mutual fund that invests in highly liquid, short-term instruments. Money Market Funds essentially pool money from investors and invest in highly liquid short-term investments such as treasury bonds, bills, and cash equivalent securities.
They then earn returns from these assets and share the profits with investors.
The Money Market Fund ecosystem involves three main players;
a. The Fund Manager who is responsible for creating an investment portfolio on behalf of its investors
b. The custodian; is often a bank that holds money on behalf of the investors and releases it per an investment policy
c. The trustee is an entity that ensures the fund manager and custodian make responsible decisions and holds them liable for malpractice.
In Kenya, all MMFs are licensed and regulated by the Capital Markets Authority (CMA). The extensive oversight and nature of investment portfolios make MMFs low-risk investments.
Pros of Investing in MMFs
In the pool of investment asset class choices, MMFs offer a hard bargain making them a top choice for many investors. Some of the pros of MMFs include:
1. Highly liquid.
Typically, you can access your money within 2-5 business days. For some MMFs, you can even withdraw some minimum amount instantly or get your withdrawal processed within the same day.
This is mainly because MMFs invest in securities that mature in short periods and can easily be liquidated allowing investors to come in and out of funds at will. High liquidity makes MMFs suitable for emergency funds and other short-term savings plans.
2. Low risk
Regulation makes MMFs a very low-risk investment and hardly will you lose your money. An MMF is almost a zero-risk investment as capital is rarely lost unless in extremely negative market conditions and poor risk management by the fund manager.
3. Little capital required
While other investment options require months of saving before accumulating the requisite starting amount, MMFs have an average initial cost between Ksh 1,000-5,000 with some requiring as little as Ksh 100 to get started. This makes MMFs a viable investment option for most Kenyans including low-income earners. By pooling capital from multiple investors, MMFs invest in areas like treasury bills and bonds that wouldn’t be an investment option for the average individual.
4. Better returns than bank accounts
Both MMFs and bank accounts offer a low-risk, high-liquidity profile. Banks however offer a lower annual return rate and require a heftier investment to beat inflation. MMFs have an average annual return rate of around 10-12% at lower capital investments. Do note that this can go higher or lower as the MMF returns are mainly driven by the return of short-term government securities normally referred to as Treasury bills.
This makes them ideal for hedging against inflation.
While Money Market Funds have a lot of pros, they have but one con which has to do with their suitability in certain areas. MMFs are unsuitable for long-term investments like retirement planning as they do not offer much capital appreciation. They are ideal for short-term investments preferably not lasting more than 3 years.
If you’re looking to invest in an MMF you will be spoilt for choice as Kenya has over 20 MMFs regulated by the CMA. This necessitates due diligence in picking one that fits your investment plan and is well-managed.
Factors to consider when choosing an MMF
I. Regulation
All Money Market Funds are regulated by the Capital Markets Authority (CMA). This is a legal requirement and you should ascertain their operational license before negotiations. Be wary of scammers who might swindle you of your hard-earned money.
II. Ease of Access
You need to consider how easily an MMF allows you to access your money or make deposits. On average, you can access your money within 2-5 business days. Some MMFs allow you to access certain amounts of your money within 24 hours. Some even allow deposits and withdrawals via Mpesa.
III. Technology.
You want an MMF with an app or portal that you can use to track your investments, make withdrawals and even initiate deposits.
Our MMF Recommendations
As a financial advisor, I highly recommend the following Money Market Funds.
1. Sanlam MMF.
Sanlam is the largest fund manager in the East African region and only requires an initial deposit of KES 2500 and you can top up with any amount as low as KES 1,000
They also have a seamless app and portal that you can use to track your investments.
To join Sanlam MMF. Use this link and invest in less than 5 minutes
2. CIC MMF.
CIC MMF is the largest unit trust scheme in Kenya considering Assets under management. They also have an excellent mobile app to track your investments. The minimum investment is KES 1,000
You can join CIC MMF via this link in less than 5 minutes
What do you need to Open an MMF Account?
After a thorough research and comparison, you should be able to pick an MMF that fits your investment goals and interests. To save time, you can go with our recommendations above.
You only need to fill out the application form which is usually available online (in the links we have provided above)
According to law, you must be at least 18 years of age, hold a national identification card or a passport and have a KRA pin. Your bank account details will also be required for processing.
Why do investors love MMFs?
Money Market Funds are a preferred investment avenue as they provide a low-risk option for accumulating short-term funds while beating inflation. They are ideal for emergency funds, school fees, wedding and holiday funds, and for saving towards bigger investments like real estate or entering the stock market.
While MMFs are low-risk, mismanagement and very high inflation rates can still impact your savings. In Kenya, interest earned from MMFs is subject to a 15% withholding tax.
Do note that the management fee and withholding Tax of 15% are charged on the interest earned, not on the principal amount.
If you’re considering investing in an MMF, read our next article where we compare the top Money Market Funds in Kenya to help you select a fund.