Investing in Money Market Funds

You have finally made a decision to start investing but have no idea where to begin. Well, let me introduce you to the Money Market Fund.

A Money Market fund is a form of unit trust that invests in short-term debt securities such as treasury bills (government debt), commercial paper (company debt) and fixed deposits (banks).

By investing in short term securities, the funds try to reduce the uncertainty of the financial markets. This helps to manage risks. Due to their low risk, they are usually great for both saving and investing.

How it works

When you invest in a money market fund, you are buying units in the fund. Those units are then used to buy short term securities.

When a fund makes a profit, the profit is equally shared among all the units in the fund. In other words, you split the profits (and the losses) equally with other investors of the fund.

Why Invest in Money Market Funds

• Professionally Managed. Fund managers do all the hard work in deciding where to invest your money while you sit back and watch it grow
• Compounding Interest. Compounding is the interest that you earn on interest. This makes the fund to continue to grow. Over time, this can lead to a significant increase in the value of your investment.
• Affordable. You don’t need a lot of money to start and keep investing in a money market fund
• Accessible. On average, you can get your money between 3-5 days depending on the fund.
• Stable. They are very low risk so your money is generally safe

Money market funds are best suited for

• Savings. They offer higher returns than most savings account in Kenya. This makes it ideal for creating an emergency fund.
• Future projects. If you are planning on buying a car, a piece of land or start a project, you can use the fund to accumulate the required money.
• Investment opportunities. You can use it for holding cash that you want to use for investment opportunities that may arise

A savings account in Kenya earns between 3-4% interest while a money market fund earns 6-10%

The Fees

For all their hard work, the fund managers get paid fees to manage the fund. These fees are called management fees. There are also other fees charged including processing fees, transaction fees etc

The total fees are usually in the range of 1-3% of the invested amount but some could be higher depending on the fund.

In Kenya, you have to pay a 15% withholding tax from any interest that you earn.

Things to watch out for

Here are some things to consider while searching for a money market fund.

Higher Than Normal Returns

To make as much money as possible, we tend to go with the fund that offers the highest return. But in this case, that may be a bad thing.

If a fund offers you a 3-5% higher return than what the rest are offering, then they are probably investing in something that is high risk.

Remember the higher the return, the higher the risk on your investments. This beats the purpose of the money market fund being a low-risk investment.

Low Returns

If a money market fund offers a lower return than a treasury bill which is around 6%, then you may need to start shopping for another fund.

Research, Research, Research

I know that researching is not fun but when it comes to your money, it is something that you have to do.

When researching look for the following:

• Information on the company. The shareholders, board of directors and key management staff of the fund. Are they reputable? How many years of experience do they have?
• Look at how the fund has performed in the last few years and the returns. Be sure to look at more than one year of returns. But also note past returns is not always indicative of future returns because of market fluctuations.
• Check if the fund is regulated by the relevant authorities. In Kenya, that would be the Capital Market Authority.

Watch the fees

For you to maximise your earnings, you should go with a fund that has lower fees. The higher the fees the less money you make.

Getting started.

Now that you are ready to get started with investing in a money market fund, you need to find a fund manager.

To help get you started, I created a list of 5 great money market funds in Kenya.

Final Note

You can start investing in a money market fund for as low as KSh 1000 depending on the fund.

If you take the spare change you get from your matatu trip and shopping per month and invested that in a money market fund, you will be surprised at how much you would have invested and earned at the end of the year