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Entrepreneur's Corner

Why You Should Invest in Money Market Funds

BY Lynnet Okumu · May 12, 2022 09:05 am

KEY POINTS

You can hardly lose your money in an MMF. You never lose your capital. They are almost risk-free and invest in cash equivalents with very low risk.

KEY TAKEAWAYS

Like other types of mutual funds, Money Market funds assemble a portfolio of securities and sell shares to investors, who earn returns from the portfolio in the form of income and capital gains.

They build portfolios and invest in highly liquid short-term investments such as treasury bonds, treasury bills, and cash equivalent securities like bankers’ acceptances, certificates of deposit (CDs), commercial paper, and repurchase agreements.

Most people are eager to make their money work hard for them, but this is not always an easy financial goal. When you have limited funds, you have to be careful concerning your investments and where you put your money.

You can consider options as a beginner, even if you only have a small amount of money to invest. One such option is Money Market Funds (MMF).

An MMF is a type of mutual fund that invests in cash and low-risk, short-term debt securities. They are considered one of the least risky investment vehicles available, generating income and usually on par with short-term interest rates that may be either taxable or tax-exempt, depending on the investments held by the fund.

In Kenya, there are over 20 MMFs that are regulated by the Capital Markets Authority (CMA).

How Do Money Market Funds Work?

Like other types of mutual funds, Money Market funds assemble a portfolio of securities and sell shares to investors, who earn returns from the portfolio in the form of income and capital gains.

They build portfolios and invest in highly liquid short-term investments such as treasury bonds, treasury bills, and cash equivalent securities like bankers’ acceptances, certificates of deposit (CDs), commercial paper, and repurchase agreements.

Why Should You Invest In Money Market Funds?

Investing in MMFs has several benefits, including;

  1. Highly liquid.

You can access your money within 2- 5 days.

  1. Low Risk

You can hardly lose your money in an MMF. You never lose your capital. They are almost risk-free and invest in cash equivalents with very low risk.

  1. Little capital is required to get started

Some MMFs require as little as 100 shillings to get started. The average initial investment lies between 1,000- and 5,000. They allow you to invest in areas like treasury bills and bonds that you wouldn’t otherwise invest in as an individual.

  1. Better returns than bank accounts

MMFs have average annual return rates of around 7-10 percent higher return rates than banks’ saving accounts and as a hedge against inflation.

Investors Prefer Money Market Funds for several other reasons, such as giving you the ideal avenue to stacking your emergency fund and accumulating your savings for a more significant investment like real estate, buying land, or entry into the stock market.

Also, MMFs can help you stack cash intended to meet your short-term goals like Wedding plans, holiday plans, or school fees.

For beginners, consider the following factors when choosing an MMF to Invest In

  1. Performance Record – How has the fund performed in the last 5-10 years
  2. Average annual return rates – Be cautious of MMFs that have higher average annual return rates than their peers or the market average.
  3. Investment costs – MMFs charge fees like management fees and withdrawal fees
  4. Ease of Access – How easily can you access your money?
  5. Where do they invest their money? – Look at their portfolios. Are they investing their money in highly risky investments?

How To Join an MMF?

You will need to fill out the application form (Most of them are online & you can find them on their websites)

Requirements:

  1. Be at least 18 years of age
  2. National ID or Passport
  3. KRA pin
  4. Bank account details

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