INVESTING IN MONEY MARKET FUNDS
24 September, 2023 / Articles
Money Markets Funds (MMFs) are currently one of the most popular investment vehicles in Kenya. This is because they invest in highly liquid securities like cash equivalents, government securities and highly-rated debt-based securities therefore having a high degree of safety. They also offer relatively high returns to investors than traditional savings accounts.
This article focuses on;
- Structure of Money Market Funds,
- Money Market Funds Ecosystem,
- Performance of Money Market Funds,
- Reasons for investing in Money Market Funds, and
- How to choose a good Fund Manager.
- Structure of Money Market Funds
A Money Market Fund (MMF) is a Unit Trust Fund (UTF), which is managed by a Professional Fund Manager who invests the money you put in the fund in different asset classes, commonly referred to as Money Market Instruments. These asset classes include;
- Commercial Paper – issued by corporations to finance their short-term cash flow needs,
- Treasury bills (T-bills) and Treasury Bonds – occurs when the government borrows money from the public, and,
- Fixed deposits – are deposits in commercial banks.
A Money Market Fund can simply be explained as a big pie. By buying units of the MMF, you are in essence buying a piece of the pie, which comprises commercial paper, treasury bills and fixed deposits. This qualifies a MMF investor to be called a unit holder.
- Money Market Funds Ecosystem
The parties involved in a Money Market Fund include;
- A Professional Fund Manager, which is a company registered and regulated by the Capital Markets Authority (CMA). The Professional Fund Manager is responsible for coming up with an investment portfolio and investing the investors’ funds, according to the investment objective,
- A custodian - This is the bank that the investors sends their investment sum to and holds the investment sum on behalf of the investors. Once the fund manager makes an investment decision, the custodian releases the amount, and is invested as per the fund policy. The custodian must be approved by the Capital Markets Authority,
- The Trustees, who majorly look out for the investor’s interests. They hold the Fund Manager and the Custodian accountable and act as whistle-blowers in case they suspect fraud or other forms of malpractice. The Trustee (bank or financial institution) is chosen by the fund manager and then vetted by the Capital Markets Authority (CMA), and
- The Auditor, who audits/reviews the fund’s financial statements, which are then used by investors to assess the performance of the MMF.
These levels of accountability make MMFs low-risk investment avenues. When deciding which MMF to invest in, you should pay attention to who the various service providers are.
- Performance of Money Market Funds
Money Market Funds are the greatest avenues to invest in because of the safety they provide to your investments besides providing the higher returns than the normal banks. They also provide liquidity to investors since the funds are invested in short term securities that can be easily liquidated for cash.
Most MMFs offer returns on investments ranging from 7.0% to 10.6%. The current inflation rate is at 6.5%, meaning that the returns from the MMFs are inflation beating. They also provide higher returns than bank deposits. For example, the average returns for MMFs is 8.9% while average returns on bank deposits is 6.4%.
- Why invest in Money Market Funds
- Scope for good return - Fund managers have various options to invest in; therefore, the portfolio gets diversified, resulting in MMFs generating equitable returns. MMFs also offer average returns of 8.9% that are higher than inflation rates of 6.5% and the rates offered by current accounts,
- Liquidity – Money Market Funds provide investors with liquidity because they invest in securities that mature in short periods of time and can be easily liquidated for cash. This allows investors to come in and out of the funds at will,
- Regulatory oversight – MMFs are licensed and regulated by the CMA, which ensures the investments are made under the scope of the law. The functions of the Fund Manager, Custodian, Trustee and Auditor are separated, which contributes to the security of your investments, besides making MMFs low risk investments. CMA ensures all the operations of the MMFs are compliant with the guidelines laid out,
- Continuous professional management of the investments - MMFs are managed by a team of experienced professionals who manage the fund in a structured and organized manner as opposed to the individual investor who may invest in random fashion. Investment decisions made by the fund managers are based on extensive research, and continuous monitoring of the portfolio based on researched information. These professionals constantly keep track of the market changes and news, predict the impact they will have on the investments and take quick decisions regarding the adjustments to be made in the portfolio,
- Low Minimum Investment amounts – Most MMFs have low minimum investment amount (as low as Kshs 1,000), which is affordable by people in most facets of the economy. This provides the opportunity to invest and grow your income,
- Low costs of Investment - Due to the large amount of funds that the Fund Manager manages, very low costs accrue per investor. The Fund achieves economies of scale in research, transactions and investments,
- Diversification - Investors in MMFs can access a broader range of securities than they would when investing on their own. A common investor has limited money, which he can invest only in a few securities, and faces a great risk, but when pooled with other investors’ funds, it could be spread out over other companies,
- MMFs help in cultivating a savings culture – For people who lack savings culture, making constant top ups on your MMF investment will improve your saving habit, which will turn into a productive saving culture. The constant effort will reap off when you are in need of cash.
- What you should look for when choosing a Money Market Fund in Kenya
- Past performance of the fund – You should focus on the average returns of the MMF. CMA requires the MMFs to post their daily returns on the local newspapers, which can be a great source to track the daily returns of the Fund Managers to help you make proper investments decisions. It is important to also assess the diversification of a Fund’s investments to better understand the portfolio.
- Minimum Investment – You should know the minimum amount you require to open an account with the company for you to begin investing. Most MMFs have low minimum investment amount (as low as Kshs 1,000), which is affordable by many people in the country.
- Consistency and – Try to look for consistency in the returns of general market funds as this will help identify a stable source of income.
In conclusion, investing in a money market fund is one of the best investment decision one can make since it helps you hedge your investments from losses caused by inflation and in times of uncertainty. It is a vibrant opportunity to save especially for the younger generation since the money market funds offer higher returns than bank deposits. You can also access your funds anytime you may need it due to technological advancements. The minimum investment amount is also low, which is very affordable.