The decline in yields of government securities has led to a drop in the returns of money market funds for the second quarter of the financial year. A survey of 12 funds in Kenya revealed that 9 of the funds will distribute lower yearly returns to their investors for the next three months.
In general, yields on government securities have remained fairly low but stable due to the easing of pressure on domestic borrowing after the government surpassed its domestic borrowing targets. For instance, the interest rate on the 91-day T-Bill has gradually decreased from 11.7% recorded in January to 7.1% in June this year.
Rates on the 182 and 364-day bills have declined from 14.3% to 9.5% and 10.7% respectively. The current T-Bill auctions have resulted in attractive bids from investors, pointing to an increasingly liquid market that would result in stiff competition for the remaining viable investment options.
Based on the current interest rates of government securities, investors buying into the funds can expect minimal returns for the foreseeable future.
All in all, investing in money market funds has a lower risk and you can get higher proceeds as compared to fixed deposit plans. The returns are still higher compared to what investors can gain from other short-term instruments such as bank deposits and equities.
What Is A Money Market Fund?
A money market fund is a form of a fixed income mutual fund that invests in short-term corporate and government debt. It allows investors who cannot afford to buy high denomination securities, to pool their resources and invest under the direction of a unit trust manager.
The general aim of buying into a money market fund is to ensure you maximize your savings in order to accomplish your short-term financial goals. It is a means of acquiring greater advantages from cash bonuses, instead of letting the money lay around in a safe or a savings account.
The most common money market investments in Kenya include trading in Treasury Bills which are put for sale by the government to fund its capital expenditure and infrastructural projects.
Types Of Money Market Funds?
There are many market funds available that are usually classified by the type of debt security they buy. A diverse portfolio may comprise several versions of each of the following funds:
- Corporate funds: These funds invest in money market securities that are issued by corporate enterprises.
- Government money funds: These type of funds invests in government and agency securities, treasury bills and Government-backed businesses.
- Tax-free money market funds: These types of funds invest in securities issued by local governments or municipal authorities.
Key Features About Money Market Funds
One common characteristic of money market funds is they are not insured, even when they are purchased at the bank. So, this means there is a high possibility of a risk, but it is very minimal. Other characteristics include:
- They come with money transfer and check-writing privileges (typically with minimum limitations, requirements and fees.)
- They are secure, safe and regulated short-term debt securities.
- Fees are levied to cover the fund’s administration
- Withdrawals may incur some charges
- They are both tax-free and taxable funds
What Are The Benefits Of Investing In Money Market Funds
Money market funds are reliable instruments for short-term investments due to the following:
- More Stable: They are generally considered to be among the least volatile types of mutual fund investments.
- Funds are secure: The funds are required by government regulations to invest in low-risk investments with short maturity hence reducing their exposure to market fluctuations compared to other forms of investment.
- Offer Liquidity: It is quite simple to settle your brokerage account trades in various investments or remove funds from a money market fund.
- Diversify Your Investment: Money market funds usually hold various securities ranging from corporate to government, hence they lessen the risk of volatility or market shocks.
The downside of using a money market fund is there lacks any guarantee you will receive the total value per share when you redeem your shares. Despite money market funds investing your money in safe investments, you still run a risk of losing your funds. Also, due to the short-term and safe nature of the investments, the returns generated by money market funds are lower compared to volatile investments such as bonds and stock mutual funds.
While investing in money market funds is relatively new to many Kenyans but one must note that they provide an opportunity for individuals to save money as little as KES. 1,000. With this money, you will be able to earn interest on a money market fund on a daily basis.
In Kenya, money market funds are offered by most insurance companies; however, the best options are Old Mutual, CIC, Britam and Amana Capital. Money market funds are the best investment vehicles if you want to make short-term gains in the stock market and even if the worst occurs you can be assured your principle amount will be safe.
Have you invested in the stock market before? Would you consider using a money market fund? Share your thoughts with us below.