Money Management
November 11, 2024
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Money Market Funds (MMFs) are investments where investors pool their money into a fund and invest in short-term, low-risk securities that range between one day and one year. MMFs are a great investment for small investors as well as large investors. They usually have low entry requirements, making them accessible to many people.
The competitiveness of an investment is dependent on the investment’s returns. This article will take you through how to calculate MMF returns for 2024.
Read Also: Money Markets Funds in Kenya: Features and Key Considerations
When calculating your Money Market Fund (MMF) returns, there are three things you should understand.
You can easily find this information through your fund provider, especially if you want to understand how many shares you have. Information on the NAV and the APR can be found on your fund provider’s website.
In addition, most funds have their shares valued at Sh1, meaning that the number of shares you hold is equivalent to the amount you have invested. Ensure you double-check with your fund provider to ascertain if this is the case.
Therefore, when calculating your return from your MMF investment, you need to calculate the total value of your investment. For instance, if you have invested Ksh50,000 in an MMF whose NAV is Ksh1 and the shares are also Ksh1, the total value of your investment will be Ksh50,000.
Total value = NAV x Number of Shares
Now that you know the total value of your investment, you can determine how much the investment is going to earn you. The rate of return is usually expressed annually; however, you can adapt it to any other time period you want to calculate for. For instance, if a fund has an average rate of return of 10%, here is how you calculate your returns.
Returns = Total value x APR
Returns = Ksh50,000 x 10%
Returns = Ksh5,000
Knowing the total value of your investment and the returns it has earned, the final value of your investment is:
Total value + Returns
In our example, that will be
Kshh50,000 + Ksh5,000
Final value = Ksh55,000
Regularly check the performance of the underlying assets in your MMF investment, as the performance of your investment is tied to their performance. When the rate of yield fluctuates, adjust your calculations accordingly.
Read Also: Top Money Market Funds in Kenya
In addition to earning you returns, MMFs also have other advantages. Here are some of them:
Low Risk: MMFs usually invest in short-term, high-quality securities, which reduces their risk exposure as opposed to other investments such as stocks and long-term bonds.
Capital Preservation: MMFs offer relatively conservative returns. This makes the investments preferable for capital preservation rather than capital gains. Additionally, they are ideal for capital preservation because of the ease of entry and exit into the funds and the low risk associated with such investments.
Liquidity: MMFs allow investors to access their funds whenever needed. The investor only has to make the request for their money within the stipulated notice period and their money will be available.
Diversification: MMFs invest in a diversified portfolio. The portfolio includes varied short-term securities issued by various entities, such as the government, companies, and financial institutions. The diversification helps spread the risk.
Professional Management: You do not have to understand the technicalities of your investments since MMFs are managed by professionals who make investment decisions on behalf of the investors.
Regulations: In Kenya, MMFs are regulated by the Capital Markets Authority (CMA). Regulations ensure that the fund is operating within the law and upholding investor interests.
Read Also: Difference Between Unit Trusts and Money Market Funds
What is a Money Market Fund?
A money market fund (MMF) is a type of mutual fund that invests in short-term, low-risk securities such as Treasury bills, commercial paper, certificates of deposit, and short-term bonds.
How do Money Market Funds Work?
Money market funds pool funds from multiple investors and invest in a diversified portfolio of short-term securities with maturities typically ranging from one day to one year.
What are the Benefits of Investing in Money Market Funds?
Money market funds offer several benefits, including low risk, capital preservation, liquidity, diversification, professional management, and regulatory oversight.
Are Money Market Funds Safe?
While money market funds are considered relatively safe investments, they are not risk-free. They are subject to risks such as interest rate risk, credit risk, inflation risk, and regulatory and market risks.
How Can I Invest in Money Market Funds?
Investors can invest in money market funds through brokerage accounts, mutual fund companies, or online investment platforms. Most money market funds have low minimum investment requirements, making them accessible to individual investors.
How Often Can I Withdraw Money from a Money Market Fund?
Money market funds offer high liquidity, allowing investors to withdraw their funds frequently without penalty. However, individual fund providers may have specific policies regarding withdrawal limits and processing times.
Read Also: Where Do I Keep My Savings? Money Market Funds
Calculating your returns from your MMF investments is not complicated. You only need to understand the total value of your investment and multiply that with the APY offered by your fund. Since the APY is calculated yearly, you can adjust it monthly depending on the time period you want to calculate for.
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