Personal Finance

Money market funds for risk-averse investors


Risk vs reward. FILE PHOTO | NMG

Preference of money market funds as short-term investment vehicles is emerging. Few years back, a majority of Kenyans did not go further than banks when looking for safe options to save their money and earn an interest.

Well, not anymore. Banks have over the years given their clientele a layer of protection to their funds, however, they have been associated with low interest rates both on their current and saving account (CASA).

Money market funds typically mimic bank accounts, but as opposed to direct investment in specific asset instruments, they benefit the investor with portfolio diversification, liquidity, and economies of scale, fund manager’s expertise, principal preservation and the power of compounding interest.

In Kenya, money market funds have rivalled investment and banking options, through offering high returns, funds protection and ability to withdraw ones funds and make investment top-ups anytime.

Money market funds are managed by collecting investor cash 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, a report by Cytonn Investments detailed the weighted average growth in assets under management (AUM) for money market funds for the H1’2019 results, which stood at 28.2 percent, compared to banks’ deposit growth that stood at 12.6 percent for the same period.

However, It is worthy to note that money market funds substantially contributed to the growth of banks' deposits during this period.

The growth of the weighted average in assets of the money market funds can be attributed to an increased subscription as a result of higher effective annual yields registered by individual fund managers between five — 11 percent 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 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 undisputedly the best low-risk and yet high-return investment options, world over.

In Europe, money market funds are categorised into two segments, largely attributed to the pricing models.

Funds using Variable Net Asset Valuation (VNAV) are mostly French funds in euro denominations.

According to the 2018 money market report by Deutsche Bank, these funds account for 43 percent of the total market share while the remaining 57 percent market segment accounts for the funds using Constant Net Asset Valuation (CNAV) most of which are domiciled in Ireland and Luxembourg in Great Britain pound GBP and US dollar denominations.

In Kenya, the money market fund pricing model is the Constant Net Asset Valuation (CNAV) where one unit is equivalent to one 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 being useful to investors in tax-planning, liquid but steady returns and risk reduction as a result of asset diversification and capital preservation.

The writer is a private wealth manager at Cytonn Investments.