Why Are Money Market Funds Performing Better Than Equities And Real Estate?

As the year 2022 starts to take shape, anyone who cares about making extra cash this is year is thinking of where to place their money. This being a general election year, it is even more difficult to know exactly an investment vehicle that is safe.

Historically, Kenyan general elections are bad for business. This year, many investors are likely to adopt the wait-and-see approach as they study the political wind. President Uhuru Kenyatta is set to pave way for a new regime hence the uncertainty.

Despite the uncertainty, where can one put their money this year? Analysts from Cytonn Investments think that money market funds are the best bet for Kenyans despite the election being in the offing.

According to Cytonn, money market funds performed better than other sectors including equities and real estate in Kenya in 2021. The same trend is expected to continue this year. The question is, why are money market funds doing better than other sectors?

Read More: Top 10 Money Market Funds In Kenya As Of November 19

When Covid-19 first hit the country, virtually every sector was hit. Businesses shut down en masse and people lost their jobs. But those who had trusted their funds in money markets were least affected by the sweeping pandemic. Why?

The analysts at Cytonn attributed the good performance of the Money market funds to their higher returns as compared to the returns offered by the other asset classes. The analysts said that many people were attracted to MMFs than other assets.

“Money market funds offer a good safe haven for investors who wish to switch from a higher risk portfolio to a low-risk portfolio, especially in times of uncertainty,” said Cytonn in a statement.

Read More: Here Are The Best Performing Money Market Funds In Kenya

In 2021, the Cytonn Money Market Fund (CMMF) had the highest effective annual yield of 10.5 percent compared to an industry average of 8.8 percent. The Fund has sustained the lead among other market players even as the year kicks off.

At the same time, other asset classes recorded improvements from 2020 with NASI being the largest gainer having increased by 14.1 percentage points to a return of 5.5 percent, from a decline of 8.6 percent in 2020.

Understanding Money Market Funds 

Money Market Funds (MMFs) are a type of Unit Trust Funds (UTFs) that pool funds from different investors and mainly invest in short-term debt instruments such as Treasury Bills and Commercial Papers, and also in Money Market Instruments such as Call and Fixed Deposits.

Given the low initial investment amount required in most Money Market Funds and the fact that most youths are just starting off their investment journey, investing in a money market fund provides a good starting point.

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Some of the reasons why Money Market Funds are doing well are:

Low Minimum Amounts

Money market funds do not require huge initial investment amounts as compared to other investments such as xx. One can begin investing in MMFs with as little as Kshs 1,000 in select Money Market Funds.

Low Risk & High returns

The other advantage of Money Market Funds is the ability to generate high returns from a low-risk investment. Money market funds seek to obtain a high level of current income while protecting investors’ capital and liquidity.

In addition to this, returns generated from Money Market Funds tend to be relatively stable compared to returns from other funds such as Equity Fund, which invests heavily in the volatile Equities Market.

For instance, during the COVID-19 pandemic period, the yields from money market funds remained relatively stable, attributable to the upward readjustment of the yield curve,

Professional Fund Management

Money market funds are managed by professional fund managers with significant expertise and experience accrued over a period of time.

This means that an investor does not need to have knowledge of what exactly is happening in the markets to profit from their investments. The fund managers take care of that and ensure that investments are made based on comprehensive research and analysis coupled with sound risk management strategies,

Regulatory and Trustee Oversight

Money market funds are regulated by CMA oversee all operations of the fund and ensure that the funds are invested in line with the stipulated regulations and guidelines.

Additionally, Money Market Funds have the oversight of a Trustee who acts as the overseer for the fund’s unitholders and ensures that the interest of the investors is protected.

Attractive Returns

Money Market Funds offer attractive rates given their diversification strategy that maximizes returns on a risk-adjusted basis, and,

High Liquidity

A unitholder in a money market fund can easily convert their investment to cash and this is an attractive feature to the youth who would want to be guaranteed availability of their funds whenever they need it. However, this varies from one fund manager to another since there are funds with lengthier timelines for withdrawal than others.

Given that the youth tend to lean towards liquidity, stability, and security of capital invested, investing in Money Market Funds provides a good entry point in their investment journey.

Money market funds offer a good stepping stone into investments and are key in cultivating an investing culture among the youth who would then expand their horizon and diversify their portfolios into different asset classes over time.

The fund managers verse experience in fund management also ensures that the investors’ funds are invested in a structured and organized manner as opposed to investing in a random fashion.

“We expect the economic recovery seen in 2021 to continue in 2022. Additionally, we expect the interest rates environment to remain stable as the government continues to reject expensive bids in the auction market in an effort to keep the rates low,” said Stellah Swakei, a research and investment assistant at Cytonn Investments.

Read More: Why Should Kenyan Youth Invest In Money Market Funds?