Why the Youth Should Invest in Money Market Funds
19 April, 2024 / Articles
Young people who want to begin their investment journey are often faced with the challenge of choosing the most suitable investment avenue given the various investment options available in the market. Before beginning the investment journey, it is important for the potential investors to familiarize themselves on what investments is and the various categories of Investments products. Simply put, an investment is an asset or item acquired with the goal of generating income or appreciation and involves purchasing an asset with the intention that in the near future, the assets will generate income or be sold for a higher price. Investments can be categorized into two, i.e. Traditional Investment and Alternative Investments. Traditional Investments includes Equities, Fixed Income and Mutual Funds/ Unit Funds, while Alternative Investments includes Real Estate, Private Equity and Exchange Traded Funds (ETFs).
Money Market Funds (MMFs) are a type of Unit Trust Funds (UTFs) that pool funds from different investors and mainly invest in short-term debt instruments such as Treasury Bills and Commercial Papers, and also in Money Market Instruments such as Call and Fixed Deposits. MMFs are managed by professional Fund Managers who invest the pooled funds in a portfolio of securities with the aim of generating returns in line with the specific fund objectives. Key to note, the funds and the fund managers are fully regulated by the Capital Markets Authority (CMA). Given the low initial investment amount required in most Money Market Funds and the fact that most youth are just starting off their investment journey, investing in a money market fund provides a good starting point. Below we look at the advantages Money Market Funds provide to investors;
- Low Minimum Amounts – Money market funds do not require huge initial investment amounts as compared to making investments into the stock market or in government securities like treasury bills and bonds. One can begin investing in MMFs with as little as Kshs 1,000 in select Money Market Funds,
- Low Risk & High returns - The other advantage of Money Market Funds is the ability to generate high returns from a low-risk investment. Money market funds seek to obtain a high level of current income while protecting investors’ capital and liquidity. In addition to this, returns generated from Money Market Funds tend to be relatively stable compared to returns from other funds such as Equity Fund, which invests heavily in the volatile Equities Market. For instance, during the COVID-19 pandemic period, the yields from money market funds remained relatively stable, attributable to the upward readjustment of the yield curve,
- Professional Fund Management – Money market funds are managed by professional fund managers with significant expertise and experience accrued over a period of time. This means that an investor does not need to have knowledge of what exactly is happening in the markets to profit from their investments. The fund managers take care of that and ensure that investments are made based on comprehensive research and analysis coupled with sound risk management strategies,
- Regulatory and Trustee Oversight – Money market funds are regulated by CMA who oversee all operations of the fund and ensures that the funds are invested in line with the stipulated regulations and guidelines. Additionally, Money Market Funds have the oversight of a Trustee who acts as the overseer for the funds unit holders and ensures that the interest of the investors are protected,
- Attractive Returns – Money Market Funds offer attractive rates given their diversification strategy that maximizes returns on a risk adjusted basis, and,
- High Liquidity - A unit holder in a money market fund can easily convert their investment to cash and this is an attractive feature to the youth who would want to be guaranteed availability of their funds whenever they need it. However, this varies from one fund manager to another since there are funds with lengthier timelines for withdrawal than others.
Given that the youth tend to lean towards liquidity, stability and security of capital invested, investing in Money Market Funds provides a good entry point in their investment journey. Money market funds offer a good stepping stone into investments and are key in cultivating an investing culture among the youth who would then expand their horizon and diversify their portfolios into different asset classes over time. The fund managers’ vast experience in fund management also ensures that the investors’ funds are invested in a structured and organized manner as opposed to investing in a random fashion. Therefore, before investing in Money Market Funds, it is important for the young people to do their due diligence before picking the specific Money Market Fund to invest in. They should also understand the investment objective of the fund and ensure that it aligns with their financial goals.
