A money market is one of the classes of financial markets that deal in short term investments such as treasury bills, call money, commercial papers, certificates of deposit, term money, bank deposits etc
Besides money markets being synonymous with duration periods of less than a year, they are also regarded as low risk due to their nature of capital preservation whereby funds invested are intact and shielded against external factors such as inflation. However, due to this very reason, they therefore attract less returns.
Money markets also offer higher and consistent rates in comparison to banks. Typically, money market rates range between 8-10% while bank rates are roughly 3-5%. In addition, these rates earn interest daily and are compounded monthly.
Owing to the above, money markets are considered as a reliable platform towards the achievement of certain financial goals such as building of an emergency fund, saving for holidays etc
Types Of Money Markets In Kenya
The financial instruments involved in money markets generally include:
Treasury bills: These are 91/182/364 day bills issued by government in return for capital to finance government projects. They are usually sold weekly and at a discount whereby investors choose the amount that they will receive when the bill matures, or the face value of the bill, and pay less than that amount when purchasing it.
Commercial paper: These are loans given to private companies.
Bank deposits: These are usually classified under fixed (deposits lasting for more than a year) and call(deposits with a duration period of less than 1 year)
How To Invest In Money Markets In Kenya
Investments in money markets can be done via two avenues i.e directly which involves an individual approaching central bank in order to purchase treasury bills or commercial banks for bank deposits or indirectly through collective investment schemes.
Collective investments schemes are funds pooled together by various investors to a professional management entity with the aim of receiving returns. Such schemes are beneficial in terms of tax exemption, liquidity, diversification and good returns.
In addition to being managed by professionals, they also have a wider access to different investment products and also provide various types of schemes such as regular income plan, growth plan, equity funds, debt funds as well as balanced funds.
In Kenya, we have three types of collective investment schemes mainly unit trusts, mutual funds and employee share ownership plans.
Unit trusts ( money market funds ) are schemes whereby money market instruments are traded and are basically managed under the Unit Trust Act while Mutual funds trade stocks or bonds are managed under the Company Act.
The Unit trusts are regulated by the Capital Market Authority which oversees all the other participants such as:
Custodian: This is usually an accredited financial institution which majorly holds and safeguards all unit trust assets.
Fund manager: Upholds administrative duties by ensuring division of the resources to various money markets by coming up with the right pricing of the units as well as marketing the funds.
Auditor: Ensures the financial accuracy of the unit trust reports.
Trustee: Oversees the operations of the both the custodian and fund manager and ensure that they discharge their duties effectively.
In Kenya, there are several money market funds offering different interest rates but generally, all money market funds attract a withholding tax of 15% taxed exclusively on interest earned.
In addition, money market funds charge a certain percentage as management fee. This fee is collected so as to pay the above mentioned unit trust stakeholders. However, this fee is sometimes included in the overall interest rate quoted by a unit trust therefore it is usually advisable to find out whether the rate offered is NET of management fees or GROSS.
For example, if a unit trust offers a rate of 9% and the management fee (2%) is net, then that is the actual return rate you should expect. However, if the management fee is gross, you will need to deduct the management fee, thereby bringing your return rate to 7%
How To Calculate Interest Rate On Money Market Account
The general formula for calculating interest rate for a money market fund is as below
Gross interest = Principal * Number of days* interest rate/365
Net interest = Gross interest * Withholding tax
How To Join A Money Market Fund In Kenya
There are various requirements needed to join the various money market funds in Kenya either as an individual, corporate, self-help group or foreigner. Below are some of the money market funds in Kenya, their requirements and how to apply.
- How To Join Zimele Money Market Fund
- How To Join Madison Money Market Fund
- How To Join Britam Money Market Fund
- How To Join Old Mutual Money Market Fund
- How To Join Cytonn Money Market Fund
- How To Join Sanlam Money Market Fund
- How To Join CIC Money Market Fund
- How To Join Stanlib Money Market Fund