A preference for money market funds (MMFs) as short-term investment vehicles is emerging.
A few years ago, most Kenyans didn’t go further than banks when looking for safe options to save their money and earn interest. This is no longer the case. While banks provide their clients safety, current and savings accounts offer low-interest rates.
MMFs typically mimic bank accounts, but as opposed to direct investment in specific asset instruments, they benefit the investor with portfolio diversification, liquidity, economies of scale, fund manager’s expertise, principal preservation and the power of compounding interest.
In Kenya, MMFs rival banking options by offering high returns, fund protection and the ability to withdraw one’s funds and make investment top-ups anytime. Money market funds are managed by collecting investor funds into a common pool called a custodial account and hiring a professional fund manager, a trustee and an external auditor, each with distinct roles towards delivering a specific investment objective as established for the scheme.
They are classified as Collective Investment Schemes alongside other trust funds and mutual funds. These schemes are licensed and regulated by the Capital Markets Authority (CMA) under the Capital Markets Act. Cap. 485 A, 2001.
In August 2019, the weighted average growth in assets under management (AUM) for money market funds for the H1’2019 results, which stood at 28.2%, compared to banks’ deposit growth that stood at 12.6% for the same period.
However, it is worth noting that money market funds substantially contributed to the growth of banks’ deposits during this period. The growth of the weighted average in assets of money market funds can be attributed to an increased subscription as a result of higher effective annual yields registered by individual fund managers between 5% – 11% for the last one year.
Besides, there is principal preservation for conservative investors with a low-risk profile, tax benefits, and liquidity that suits short-term investors and millennials. These features are inherent from the underlying assets that range from, high-quality, short-term debt instruments to related cash equivalents. These assets include an allocation to government securities mostly T-Bills, term deposits in banks, and selected commercial papers.
This unique cocktail of investment classes has made money market funds one of the best low-risk and yet high-return investment options, the world over.
In Europe, money market funds are categorized into two segments, largely attributed to the pricing models. Funds using Variable Net Asset Valuation (VNAV) are mostly French funds in EUR denominations.
According to the 2018 Money Market Report by Deutsche Bank, these funds account for 43% of the total market share while the remaining 57% market segment accounts for the funds using Constant Net Asset Valuation (CNAV) most of which are domiciled in Ireland and Luxemburg in GBP and USD denominations. In Kenya, the money market fund pricing model is the Constant Net Asset Valuation (CNAV) where one unit is equivalent to one Kenya shilling.
Looking into the future, the role of money market funds as an intermediary between financial and non-financial sectors in Kenya, cannot be overlooked. Most importantly, money market funds will continue helping investors in tax-planning as a result of the 15% tax advantage, high returns and risk reduction as a result of investment diversification and capital preservation.
Written by Michael Obaga
Michael Obaga is a Financial Advisor at Cytonn Investments.