Why do you want to invest your money in MMFs? Is it because everyone else seems to be doing it? What returns do you expect? Well, Rhina Namsia, the founder and chief executive officer of The Acemt Consulting, a training and consultation company that provides financial planning and investment advisory, delves into the current wave of Money Market Funds and how this wave can either build your money or drown your financially:

It’s a typical Kenyan behavior that we all rush into something like a tsunami. One of these scenarios is the ongoing Money Market Funds (MMFs) wave. Everyone is now somehow aware of it and there’s no better feeling for us on the financial literacy space than that.

The only downside is that most people want to get into it just because it’s the trending financial vehicle at the moment – especially given that banks are also moving into that space, and not because they know if MMFs will and should work for them or not.

The Sacco wave happened and many were found swimming naked when the tides disappeared. The stock market happens when there’s a bull run and obviously if you enter that market blindly at such a time, you’ll also be found swimming naked when the bear run kicks off.

By swimming naked, I mean investing without proper knowledge of how an asset class works. Knowing how an asset is structured is a good way to start knowing how it will behave in different markets and whether it will even serve you.

Now back to money markets; An MMF is not a quick money-making entity. Neither does it need to be compared to putting your money into a business. It is a class of its own.

Many who are complaining about it, went in with say Sh. 1 million with an expectation that their money would double up or something. But that 13 per cent you’re seeing my friend, is not a Simple interest. It is an annual compound interest; meaning both your capital and interest earns a daily interest and continues earning interest on a daily basis.

Rhina Namsia: Money Market Funds are popping up all over; Is yours working for you?

Compound interest is said to be like an 8th wonder of the world. In short, your capital can surprise you if you can be patient with it over time because of the structure of interest earning interest. But if you expect it to do miracles instantly you’ll also be surprised too and will soon start whining!

So what is the strategy?

Start early with MMFs: This means you’ll be saving a lower regular contribution rate towards a goal you may have, compared to someone who wants to achieve a similar goal but starts later in life.

Have time in the market: Try out a Compound interest calculation of Sh. 1 million over 5 years and compare that with simple interest of the same rate and see the wonder of compound interest rating.

Idle cash: Put in money that is idle or awaiting some other big investment. This is to avoid inflation, fees and any other costs involved in storing money that lead to lost value.

Don’t be greedy: Before you invest your money in MMFs, Choose a fund that works for you and not just the returns then contribute to it regularly.

Know Money Markets: Understand how money markets work first before putting your money in. There are so many Financial Literacy Classes currently and MMF is just one of the units offered by most. Invest in yourself as well by investing in financial literacy classes.