What to Consider When Choosing an MMF

In recent years, money market funds (MMFs) have been growing in popularity among Kenyans looking for savings products that promise better returns than traditional savings accounts. 

MMFs pool funds from multiple investors and invest them in low-risk, short-term instruments such as government securities, treasury bills, and fixed deposits. This risk-averse strategy ensures diversification and provides modest returns.  

However, the choice can be overwhelming, with many MMFs available from commercial banks, investment banks, investment management firms, and insurance companies. When you are spoilt for choice, the main question becomes, “How do I pick an MMF to invest in?” 

Like any financial product, selecting the right MMF requires careful consideration to ensure it aligns with your financial goals and needs. This guide will walk you through the key factors to consider when choosing an MMF, helping you make an informed decision that enhances your financial well-being.

Read Also: Where Do I Keep My Savings? Money Market Fund

Minimum Investment Requirements

Each MMF has its threshold for the amount you need to start investing, and these minimums can vary widely. 

For instance, the Etica MMF requires a modest initial investment of Ksh100, making it accessible for those just beginning their investment journey. On the other hand, the Sanlam MMF has a higher minimum investment requirement of Ksh2,500, and the NABO MMF requires a substantial initial investment of Ksh100,000. 

This diversity means that regardless of your financial capacity, you can likely find an MMF that fits within your budget.

In addition to the initial investment, it's essential to consider the minimum monthly top-up amounts that most MMFs require. Regularly adding to your investment can help grow your savings, but you need to ensure that the required monthly contributions align with your financial plans. 

Choosing an MMF with manageable top-up requirements can prevent financial strain and help you maintain consistent investment habits.

Finally, some MMFs might charge joining fees, which can increase your overall initial investment costs. These fees can vary, so it's important to account for them when calculating your total initial investment. 

Understanding these costs will give you a clearer picture of the financial commitment required and help you choose an MMF that best fits your financial situation.

Read Also: Difference Between Unit Trusts and Money Market Funds

Liquidity Levels

Different MMFs offer varying degrees of liquidity, which impacts how quickly and easily you can access your funds. 

First, some MMFs may have initial lock-in periods, during which your investment is not accessible for a certain duration after you join. This can be an important consideration if you anticipate needing quick access to your money. 

The speed at which you can withdraw from an MMF also varies. For instance, the Mali MMF allows instant withdrawals, making it highly convenient for those needing immediate access to their funds. In contrast, other funds like the Co-op MMF require two to three days to process withdrawals. 

Additionally, some MMFs impose restrictions on the number of withdrawals you can make per month and set limits on the maximum amount you can withdraw within that period. These restrictions can affect your ability to use the funds as frequently as you might like. 

The liquidity level of the MMF you choose should align with your savings goals and spending habits. 

For instance, a highly liquid MMF would be advantageous if you are saving for emergencies, such as unexpected medical bills. On the other hand, if your goal is to curb impulsive spending, opting for a less liquid MMF could help you avoid frequent, unnecessary withdrawals and foster better saving habits.

Returns and Fees

MMFs pay interest on the money you invest, and these rates vary. For example, the average return from MMFs in April was 14.11%, with the Lofty Corban MMF notably offering the highest daily returns at 16.84%. 

Higher returns can significantly enhance the growth of your savings, making it essential to compare the interest rates provided by different MMFs. 

However, it's important to look beyond just the returns when choosing an MMF. Fees associated with MMFs can substantially reduce your net returns. Common fees include management fees, administration fees, transaction costs, and sometimes exit fees when you leave the MMF. 

These costs can vary widely between different MMFs and can eat into your returns, so it's crucial to understand the fee structure of each fund you're considering. 

Transparency

Transparency entails the MMF providing clear, accessible, and comprehensive information about its operations, including investment strategies, performance, fees, and regulation compliance. 

When a fund is transparent, it ensures that you, as an investor, have a full understanding of where your money is going and the risks involved. This allows you to make well-informed decisions based on accurate and complete information.

When exploring an MMF to invest in, take time to examine the fund’s prospectus or offering document. It should detail the investment strategy, risk factors, fees, and management team. Also, look for quarterly or annual reports that provide insights into the fund’s performance, holdings, and financial statements. 

Once you have that information, compare these disclosures across multiple funds to identify any that lack clarity or detail. Finally, confirm that the Capital Markets Authority licenses and regulates the MMF. This information should be readily available and verifiable through official regulatory websites. 

Reinvestment Options

MMFs typically pay interest daily, but the frequency of compounding can differ between funds, with some offering more frequent compounding than others. For instance, the Etica MMF pays, and compounds returns daily, while the Cytonn MMF pays interest daily but compounds it monthly.  

Frequent interest payouts and compounding can lead to higher returns and faster growth. Depending on your financial objectives, selecting an MMF with favourable reinvestment options can better align with your goals, such as saving for kids' school fees as returns are maximised. 

Some MMFs might promise daily compounding, but their interest rates are low. Therefore, calculate your potential returns and ensure you do not leave any money on the table. 

Finally, ensure the fund provides clear information about how often interest is compounded and whether reinvestment is automatic or requires manual action.

Read Also: How to Calculate Money Market Fund Returns

Accessibility

Accessibility here refers to how easily you can access your MMF account information and manage transactions. 

When evaluating an MMF’s accessibility, consider whether it offers the digital tools you need to manage your investment. Many MMFs offer digital platforms such as mobile apps, online portals, and USSD codes to help you monitor and control your investments. With these platforms, you can conveniently manage your investments on the go. 

However, the reliability of these platforms will vary. Therefore, take time to test them or get feedback from people who use them. You can read app reviews on the Play Store or App Store. 

Read Also: SACCOs vs. MMFs: Which One Should I Choose? 

Risk Level

MMFs typically invest in low-risk instruments that are considered relatively safe and provide stable returns over the short to medium term. However, given the types of securities it invests in, it's essential to consider the potential risks associated with the fund's investment strategy. 

While MMFs aim to minimise risk, factors such as interest rate changes, underlying securities' credit quality, and market volatility can still pose risks and reduce your returns. 

Researching the fund manager's reputation and track record is also crucial. The credibility and expertise of the fund management company play a significant role in determining the fund's performance and ability to manage risks effectively. You should look for fund managers with a proven track record of success and adherence to sound investment principles. 

Remember to do your due diligence before investing. This includes consulting financial experts or advisors to gain insights into different MMFs' performance and risk profiles. 

You should also consider reading reviews and getting feedback from other people who have invested in a fund you are considering before dipping your toes. This will give you valuable perspectives that will help you narrow down your options.

Read Also: Ways to Invest When You Have a Low-Risk Tolerance 

Your Savings Goals

Start by asking yourself: What do you plan on using the funds for and when? Understanding your financial objectives and investment time horizon will help you choose an MMF that best suits your needs. 

Highly liquid MMFs that offer quick access to funds can benefit short-term goals, whereas long-term goals might align better with MMFs that offer higher returns but may have longer withdrawal processing times or lock-in periods.

For instance: 

• If you’re saving for emergencies, you can consider MMFs with high liquidity and minimal withdrawal restrictions. 
• For anticipated expenses such as education fees, home improvements, or planned purchases, you can consider MMFs that balance good returns and moderate liquidity. 
• If you aim to maximise investment growth over time, focus on MMFs with higher returns and favourable compounding options, even if they have slightly lower liquidity.

Read Also: Why Where You Put Your Money Matters 

Wrapping Up 

Choosing and investing in an MMF can be a smart move for enhancing your financial portfolio. But like every other investment, it should be a deliberate process involving thorough research and analysis. 

Blindly picking an MMF can lead to unintended risks, reduced returns, and liquidity issues. But when you carefully evaluate your options, you can select an MMF that aligns with your financial goals and risk tolerance.