Monday, May 27, 2024

Why You Should Invest in a Money Market Fund

By Jane Muia

Co-Op post

Investing your money is the most reliable way to build your wealth over time. And while there is no universal way to make your money work for you, there is no better strategy than to diversify your portfolio. What matters is your desire towards the investment, proper budget, and knowledge on how to balance potential gains as well as risk tolerance.

There are many ways to invest, which means you can find an investment that offers a variety of returns and fit your risk profile. A good example of such investments is a Money Market Fund.

What is Money Market Fund (MMF)?

A Money Market Fund (MMF) is a type of mutual fund that invests in cash and low-risk, short-term debt securities. They are considered one of the least risky investment vehicles available, generating income and usually on par with short-term interest rates that may be either taxable or tax-exempt, depending on the investments held by the fund.

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How a Money Market Fund Works

A money market fund sells shares to investors, who earn returns in the form of income and capital gains.

They invest in short-term debt securities with high credit quality, such as treasury bills and commercial paper. Returns from these instruments are dependent on the applicable market interest rates, and therefore, the overall returns from the money market funds are also dependent on interest rates. Interest is calculated on a daily basis and credited to the client’s account.

Benefits of investing in Money Market Funds

Investing in a money market Fund provides a vast ray of benefits which include:

1. Liquidity

MMFs are highly liquid because they are invested in securities that mature very fast and can be easily liquidated for cash.

2. Safety

Money market Fund acts as safe havens for investors’ money. They are licensed and regulated by the Capital Markets Authority (CMA), which ensures that investments are made under the scope of the law. This guarantees the security of your investments.

3. Little capital is required to get started.

Investors don’t require a lot of capital to start investing in a money market fund. Most MMFs have a low minimum investment amount of as low as Kshs 1,000, which people in most facets of the economy find affordable.

4. Higher Yields

Money market funds provide room for relatively higher yield compared to banks. MMFs have an average annual return rate of around 8.9 per cent, while the average returns on bank deposits are 6.4 per cent.

5. Building a Saving culture

Making regular contributions to your MMF investment transforms your saving habit, which will turn into a productive saving culture.

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Factors to Consider Before Investing in a Money Market Fund

For beginners, there are some factors you need to consider before starting an investment journey with a particular money market fund. They include:

  1. Performance Record – How has the fund performed in the last 5-10 years
  2. Average annual return rates – Be cautious of MMFs that have higher average annual return rates than their peers or the market average.
  3. Investment costs – MMFs charge fees like management fees and withdrawal fees
  4. Ease of Access – How easily can you access your money?
  5. Where do they invest their money? – Look at their portfolios. Are they investing their money in highly risky investments?

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How to Join an MMF?

You will need to fill out the application form (Most of them are online & you can find them on their websites)

Requirements:

  • Be at least 18 years of age
  • National ID or Passport
  • KRA pin
  • Bank account details

Money Market Funds in Kenya

Below is a list of some of the money market funds in Kenya.

    1. CIC Money Market Fund
    2. Britam Money Market Fund
    3. Co-Op Money Market Fund
    4. ICEA Money Market Fund
    5. Equity Bank Money Market Fund
    6. UAP Old Mutual Money Market Fund
    7. Cytonn Money Market Fund
    8. Kuza Money Market Fund
    9. Apollo Money Market Fund
    10. Zimele Money Market Fund
    11. GenCap Hela Imara Money Market Fund
    12. NCBA Money Market Fund
    13. Nabo Money Market Fund
    14. Sanlam Money Market Fund
    15. Madison Money Market Fund
    16. Dry Associates Money Market Fund
    17. Absa Money Market Fund

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