“ No matter how hard you work, your money can work harder.”
Aya Laraya
Money market funds are investment vehicles that pool money from investors and then invest it in short-term instruments that have competitive interest rates. The rates are competitive because they are usually slightly higher than the benchmark 91 day Treasury bill rate.
The pooled funds are placed in interest-bearing investments that can be easily liquidated such as Bank fixed deposits, treasury bills and bonds, commercial papers; which is simply corporate debt. A small portion of the funds will usually be held in cash or call deposits.
How do Money Market funds work?
A money market fund will invite like-minded investors to pool their money into the fund. The fund is run by a Fund manager, who is a licensed professional. Fund Managers are licensed by the Capital Markets Authority.
The fund managers are responsible for the day-to-day running of the fund. They make the investment decisions of; when to invest, where to invest, and how much to invest. They study the markets, to get the best returns for the funds. As mentioned earlier, the allowable areas of investment are limited to low-risk investment vehicles.
Fund managers work with several other professionals such as investment and financial analysts. Sometimes a fund manager is referred to as a portfolio manager, the two terms can be used interchangeably.
Each investor opens an account and deposits money in it. Most Money Market Funds accept a monthly deposit from an investor or a one-off lump sum. The monthly payment is subject to a minimum amount usually between Kshs. 500- 1000.
Money Market funds are highly liquid so an investor can easily access their funds within a short time.
Why should you invest in a Money Market Fund?
This is one investment I encourage every new investor to have. It is attractive because
Competitive Interest Rate
The interest rate given by most money market funds is usually higher than that of bank saving accounts as well as prevailing inflation rates which means you can be sure to retain your purchasing power over time. It is a great way to preserve your capital for the future.
Easily accessible
The funds are usually liquid which means you can easily withdraw your money on short notice. This usually 3-5 working days. This is a good investment avenue if you need your money back in case of an emergency.
Affordable minimum investment
Investors can invest minimum amounts and build up their portfolio. Some Money Market Funds allow you to save and invest amounts as low as Kshs.500 only. This is very attractive even for lower-income earners and can easily fit within most budgets.
Lower Risk investment
Money Market Funds are considered as a lower risk compared to other investment vehicles in the market. The funds are largely invested in Government bonds, which are the benchmark for the risk-free rate. This is a good investment if your risk appetite or threshold is low.
Oversight by the Capital Markets Authority
Every Money Market Fund in Kenya is licensed by the Capital Markets Authority. As well as the professionals who run the fund. The Licenses are issued yearly, upon compliance with the set regulations. This oversight safeguards the investors’ monies and ensures that the funds are professionally run.
What should you consider when investing in a money market fund?
It is vital to do some due diligence before investing in a specific fund.
Track Record of the Company
Is it a solid company? It doesn’t hurt if the company is a market leader though it doesn’t need to be. I also like to check on who are in the Board and its management.
Track record of the fund manager
Who runs the fund? Together with the solid management team, I like stability. In other words, I check if the fund has a good fund manager who has great experience. If they have been working for a while with the fund, it would be great news. for a bit of time or there is a revolving door situation going on.
Track record of the fund itself
Usually, you can get the information of the fund’s track record from a financial advisor. You will need to check how long the fund has been in existence and how it has been performing. Keep in mind though that past performance is not a guarantee of what future earnings will be. Fortunes can change.
The daily newspapers usually publish the prevailing interest rates for the money market funds in Kenya.
Good Customer Care
I am big on customer care. I refuse to give my hard-earned money getting it back is a nightmare. I will go where I am kept up to date with the fund performance, I get answers to my questions and generally served well.
A bonus criterion for me is online transacting.
In this digital age and with the advent of mobile money wallets, most of us can transact with banks and other financial institutions without ever setting foot in their premises.
I save my emergency fund in the ICEA Lion Money Market Fund. It has served me well over time, they do have great customer care too.
While a money market fund is considered a low-risk investment, there is an inherent risk of loss as with any investment. It is therefore important to do all you can to assess what is the best-researched fund for you