ABC of Money – 2

This post has been inspired by recent discussions with a group of friends – you know who you are! A shout out to you all.

If you ask me, money market funds (MMFs) are probably the easiest but obviously low return ‘investment’ vehicles that take care of risk averse people like me. When it comes to personal investment, I do not consider a money market fund as an investment per se – rather as a safe place to keep your money (asset management) as you decide on what/where to make the real investment. A MMF is also a haven for emergency savings while still taking advantage of the time value of money – even if returns are minimal. After all, isn’t it better to have a dollar today than have it tomorrow? MMFs are often recommended for their superiority relative to money lying idle in a bank current account, or a saving account where it earns a lower interest rate.

Earlier today, I was doing a bit of research on the performance of MMFs in Kenya and got reminded of the fact that not everyone is as knowledgeable or even aware of their existence. I was particularly reminded of a conversation with a younger colleague mid last year. Let’s just say this person was excited to learn about MMFs via a random lunch hour conversation. I could see beaming in her eyes and knew she was a button away from saying good-bye to traditional savings account or idle money in a current account. I also realized that many young people might be unsure of what to consider when selecting their preferred money market fund.

Getting started on your first money market fund? Here are a few things to consider:

1. Minimum deposit and top up amount: Depending on your pocket size, you will be eligible to open some funds but not others. There are funds that require a minimum deposit of as low as KES 100 while others are in the range of KES 1 million. If you have already ticked boxes on which fund to go with, but the only barrier is the minimum deposit required, it may be worth giving yourself time to save via a lower minimum deposit and top ups MMF until you have sufficient funds to transfer into your preferred option.
2. Purpose of the money market fund/Ease of withdrawal: For me this is important, and I would probably consider if first. As mentioned earlier, when it comes to personal finances, I view a MMF as a place to retain the time value of your money in risk aversion. Or it could be a place to keep emergency funds from which withdrawals can be done as quickly as possible when the situation arises. Most MMFs offer withdrawals of between 24 hours to 3 or 4 working days. As we know, emergencies can require an even shorter turn around.
3. Is there a withdrawal limit? Some MMFs limit how much money you can withdraw at any time – either via mobile banking e.g. M-PESA or bank account. I think this affects mostly those who are transacting in the minimums of KES 50K (via mobile) and KES 300K (via bank). If your anticipated withdrawals are below these ranges, don’t worry yourself too much about this as a determinant of where you go.
4. Individual, group or corporate account? Depending on which option you are keen on, it may be worth checking whether the preferred MMF is giving you room to do that. For example, if you wish to operate a group MMF, there is no point considering funds that cater for individual or corporate investors only.
5. What are the customer reviews saying? You will not always find information relating to clients’ feedback online. However, should you be lucky to find people who have posted their views – although this can be subjective, they are your best chance at finding first-hand information to ensure you are not getting yourself into a bottle of frustrations when it comes to withdrawals or user interface. For example, most MMFs have a mobile app so worth finding out if it operates seamlessly and such reviews can be found in the Appstore. But I don’t think this an all too important point to consider especially if you are not going to be a regular with transactions.
6. Effective yield of the fund over a period: I think this is important because a MMF should not be confused with shares trading not unless you are aiming to bounce finances in between various money market funds within a short period of time, say quarterly or monthly. If you are keen to reap in a longer-term vis-a-vis earning compounded interest from a traditional savings account, you would be keen to review the annualized, 3-year and 5-year rates of return. The intention is to understand how the fund has performed over a longer period, rather than instantaneously. MMFs are expected to disclose such information for public knowledge, so if you find one that is being ‘caged’ about it, think twice.
7. Who is the fund manager? This is not an all-important point but to me it does matter. You do not want to have your hard-earned money under management by unknown institutions. I think some individuals or corporate investors go a step further to conduct due diligence on the asset managers, especially if putting in large sums of money. The fund manager’s historical performance also gives an indication of how much time is spent in portfolio diversification, to ensure the money reaps the highest possible returns. On the flip side, a renowned or superior fund manager might also be lazy because of the assumption that they are already trusted by the market. You may notice a huge MMF, in terms of asset base, recording weak annualized performance compared to the new kids on the block who are barely known.  End of day, it should be assuring to know that one can never lose the principal capital because fund managers are by law regulated. In Kenya, this regulation is done by the Capital Markets Authority.  The worst that could happen is investors earn no return on capital. But you can never get less than what was ploughed which is the risk averse advantage that MMFs have over shares trading.
8. Management fees: For me this is not that critical if you don’t have a huge capital base. So don’t get yourself too worked up if you are just getting started with a few bucks to your name. The headache is not worth it. What might be worth considering is the withdrawal charges. If you are operating a MMF with intentions to make regular withdrawal, then withdrawal fees would be something you want to take a keen eye on. Most MMFs in Kenya charge a management fee of between 1.2% and 2.5% p.a.
9. How long has the fund been in existence? To some people, it does not matter when a MMF was established provided the present returns are lucrative. If you ask me, the inception year is worth looking at if you are extremely risk averse and wishes to use a stable fund. How long a fund has existed says something about its stability, although not always. For a fund that has been there for a longer period, there is the extra advantage of checking its historical performance (effective yield) and make an informed decision. This is not to say we should avoid the new kids in the block who are giving double digit returns, weigh what works best for you.
10. Diversity in investment portfolio: This reminds me of a heated discussion last year in which the discussants were infuriated at why a company was investing in the same set of products, yet the market performance over the past 5 years was on the negative scale. MMFs typically invest in government securities, fixed deposits, and corporate debt. Hence the portfolio is a bit limited. However, good to keep an eye on how an asset manager is diversifying the mix within this limited portfolio. For example, a fund that has invested in too much GoK securities at such economic times might be worth scrutiny if you are putting in a lot of money. Never know!
11. Does the MMF exist in other currencies? Okay, I don’t think this is for everyone. But it kind of matters. Some funds have both the Kenyan shilling and dollar MMFs. This factor is worth considering if the current unprecedented depreciation of our local currency is anything to go by.

See below my summary analysis of a few MMFs in Kenya. Also feel free to check out this link on Vasili Africa analysis of top 15 performing MMFs as of December 2023.

Author summary information on select MMFs in Kenya

Until the next post, have yourself an informed excursion on which money market funds to opt for!