Is Your Money Safe In The Money Market Fund?

The first question before deciding to invest revolves around the safety of your Investment. Among several Investment options, Unit Trusts are becoming more popular due to their flexibility, easy access to the funds, low risk and high returns on Investment.

Just a recap of what a money market fund is. A money market fund in the simplest form is a safe place to park your money and earn an interest higher than that of a bank deposit. It is a type of collective investment scheme that allows investors to pool their resources and invest in low risk, liquid short term debt that provides higher returns.

We consider Money market funds to a high yielding, low risk, and safe investment avenue because of the following factors key factors:

1. CMA Regulation- Companies that engage in collective investment schemes have to subscribe and adhere to regulations set by the capital markets authority. These regulations are put in place to ensure the safety of investors’ funds. An example is where a fund manager has a limit for every Investment destination selected.
2. Diversified portfolio allocation. Fund Managers generally invest in debt securities that offer low risk, liquidity and flexibility.
3. Investment in relatively low risk, liquid short-term debt such as government securities which are considered the safest investment avenues.

There are rare cases where investment under management, particularly money market funds, have gone under or been affected by adverse losses, and even then, the companies affected always structure out a payment/compensation plan to regain liquidity and remit investors funds. A recent example is the case of Amana Capital, which was put in the limelight for stopping client withdrawals after investing Kshs. 275mn in Nakumatt Holdings, an amount that was close to 20 percent of their assets.

If you’re an investor and still asking whether Investing in a money market fund is safe? The answer is without a doubt an affirmative Yes. Why keep money in your bank while you can Invest in a sector that gives an annual rate of return of up to 11%?

This article was written by Abel Kemei, Chief Risk Officer at Vasili Africa.