Money Market Funds: What is it and Why Invest in it?

What is a Money Market Fund?

A money market fund is a mutual fund that allows people to invest in highly rated, short-term debt securities. Typically, money market funds offer a low single-digit return. Still, Ndovu's Money Market Fund, Ndovu Fund, has changed all this offering one of the highest interest rates in the market. Money market funds when compared with stocks, the risk to principal is considered generally low. This is the reason why money market funds provide investors with high liquidity at a low-risk level.

Money market funds have become a fundamental investment asset for many Kenyans and globally. Money Market Funds in Kenya were introduced in the mid-2000s and have only become popular in the last few years. The investment culture has changed, with investors realizing they can get better value for their money through higher interest rates than traditional savings and fixed accounts. A good example is the Ndovu Fund, a Money Market Fund that offers investors interest of up to 15.51% with deposits as low as Ksh. 500. 

How do Money Market Funds Work?

Money market funds issue redeemable shares to their investors and are required to follow the guidelines drafted by financial regulators including the Capital Markets Authority. Fund shareholders can normally withdraw their money at any time. Money market funds can invest in the following categories of debt-based financial instruments:

• Bankers Acceptances which are short-term debts that commercial banks guarantee. 

• Certifications of deposits. These are bank-issued savings certifications with a short-term period of maturity. 

• Commercial paper. These are unsecured short-term corporate debt. 

• Repurchase agreements. These are short-term government securities. 

• Kenyan Treasuries. These are short-term government debt issues. 

The returns from these instruments rely on the applicable market interest rates hence the overall returns from the money market funds are heavily dependent on interest rates. 

As an active investor, you need to understand the need to take time and have the knowledge to hunt for the best possible short-term debt instruments offering the best possible interest rates with the preferred level of risk. If you are a less-savvy investor or an individual with less disposable time, you could prefer taking the money market fund by delegating the money management task to the fund operators like Ndovu. 

Money marketing funds rival similar investment options including ultrashort bond funds, bank money market accounts, and enhanced cash funds. 

Types of Money Market Funds

There exist different classifications of money market funds that depend on the class of assets invested, attributes, and time of maturity.

Prime Money Fund

A prime money fund invests in floating-rate debt and commercial paper of non-treasury assets. They can be issued by corporations, government agencies, and also government-sponsored enterprises. 

Government Money Fund

It invests at least 99.5% of its total assets in cash, repurchase agreements, and government securities fully collateralized by cash or government money funds. Treasury funds are also in the Government money funds which invest in standard Treasury-issued debt securities including treasury bills and treasury bonds. 

Money Market Fund Regulation

In Kenya, money market funds fall under the jurisdiction of the Capital Markets Authority (CMA). The regulatory body is responsible for defining the needed guidelines for the attributes, maturity, and variety of permitted investments in an MMF. Ndovu is licensed and approved by the Capital Markets Authority (CMA) to operate as a Fund Manager and is also regulated by the Institute of Certified Investment & Financial Analysts (ICIFA), the Communications Authority, and the Nairobi Securities Exchange. To start investing now, visit our website or simply download the Ndovu app on Google Play and App Store. 

Advantages of Money Market Funds

• They are very low risk.

• They have better returns in comparison to bank accounts. 

• They are highly liquid.

Disadvantages of Money Market Funds

• It is sensitive to fluctuations in interest rates and monetary policy. 

• No or little capital appreciation. 

Present Time Money Market Funds 

Today, money market funds have become a core pillar for the present-day capital markets. Money market funds provide a diversified professionally managed portfolio that has high daily liquidity. Most investors utilize money market funds as a place to put their money until they decide on other investments or for funding demands that may come up in the short term. 

The available interest rates on different instruments that make up the portfolio of an MMF are the key factors that determine the return from a provided MMF. 

Should you Invest in a Money Market Fund?

The answer is yes. MMFs are mostly among the safest compared to other investments with a $1 target value per share. The fact that money market funds have broken the buck on only a few occasions all linked to the financial crisis and quickie have come back. It is important to understand that MMFs are not appropriate for long-term investing goals, for instance, retirement investing.  

Disclosure:

Ndovu is a regulated Robo-advisory platform operated by Ndovu Wealth Limited (‘NWL’). NWL is a Fund Manager licensed by the Capital Markets Authority (Kenya).

The information provided on this platform and the products and services offered are intended solely for persons in regions and jurisdictions where such distribution and utilization are in accordance with local laws and regulations. Ndovu does not promote its services in regions where it lacks the necessary licenses; It is exclusively available to persons residing in countries where it holds a valid license or has regulated partners. Ndovu does not extend its services to citizens of the United States, Canada, Japan, and other restricted territories.

Disclaimer:

 All ETF products are subject to risk, including country/regional, liquidity, and currency risks. Market prices of securities within the ETF may rise and fall, sometimes rapidly and unpredictably.

While ETFs provide diversification through exposure to a basket of securities, they do not eliminate the risk of loss. Diversification does not ensure a profit or protect against a loss. These are non-cis products and are registered by the SEC.