UNIT TRUST FUNDS
It’s an umbrella for collective investments schemes categorized into four funds
- Money market fund
- Balanced fund/Growth fund
- Bond fund
- Equity Fund
"Main aim of unit trust fund is to meet clients at their risk appetite level."
Money market account will target clients who have a low risk appetite.
Balanced fund will target clients with average risk appetite i.e. have small portion invested in riskier assets and the bigger portion on low risk assets to cushion capital depletion.
Bond fund will have clients who have a low risk appetite but access higher returns by taking chances with longevity.
Equity fund will target clients with high risk appetite as they primarily invest in stocks.
MONEY MARKET
They are open ended mutual funds invested in low risk environment.
- T BILLS - loans given to the government that can mature in stages of 91 days, 182 days and 364 days with different interests.
- Commercial papers – short term debt to carefully evaluated safe corporates and Banks that in turn repay with interest.
- Bank Deposits – To ensure easy flow of liquidity, investment fund managers can negotiate for better returns and invest in fixed deposits.
The interest gained from this instruments is distributed by the fund manager to the client’s portfolio, less withholding Tax and management fees.
WHY MONEY MARKET?
It’s the entry point of investment.
It helps cushion the client against inflation – most fund managers declare interest of between 8% pa. -10% pa. This helps the client to preserve the capital and stay ‘just’ above the inflation mark.
Current Inflation Rate in Kenya (CPI, ann, var.%, aop)
| 2021 | 2022 | 2023 | |
|---|---|---|---|
| JANUARY | 5.69% | 5.39% | 9.00% |
| February | 5.78% | 5.08% | 9.20% |
| March | 5.90% | 5.56% | 9.20% |
| April | 5.76% | 6.47% | 7.90% |
| May | 5.87% | 7.10% | |
| June | 6.32% | 7.90% | |
| July | 6.55% | 8.30% | |
| August | 6.57% | 8.50% | |
| September | 6.91% | 9.20% | |
| October | 6.45% | 9.59% | |
| November | 5.80% | 9.48% | |
| December | 5.73% | 9.10% | |
| AVERAGE | 6.1% | 7.63% | 8.825% |
| MONEY MARKET AVERAGE | 8.12% | 8.4% | 8.98% |
| FIXED DEPOSITS | 6.1% | 6.3% | 6.5% |
The rates from the money market account are slightly higher than in fixed deposits from banks that have averaged 6.3% over the last 3 years, this implies with the high inflation trends going on, having money in a fixed deposit might be working against you and a money market account might be helpful around this time.
2023 1st quarter data from the capital markets authority has placed the fund invested in Money market accounts from the collective fund managers at 161 Billion. This is barely competing 5.1 trillion in Bank deposits around the same time.
Easier to access – Most fund managers have a 1 to 2 days’ withdrawal TNT and some have gone an extent to create apps that can allow you withdraw from the comfort of your house
Regulated by the Capital Markets Authority (CMA) – Regulatory body charged with prime responsibility of supervising, licensing and monitoring Fund managers and intermediaries.
Power of compounding – Interest earned in a money market account is compounded to the initial principle monthly. It can offer a safe avenue for passive income where the interest earned can be used as a monthly income.
How to make use of a money market account
To create an Emergency fund.
An emergency fund is an account that sets aside money to plan for unforeseen life events such as job loss, serious medical emergency, car repairs or home repairs.
It helps create a buffer that keeps you afloat in a time of need without having to rely on credit or a high interest rate.
Its advised to save 3 to 6 months of your monthly expenses in an emergency fund so as to be able to cater for them in the unfortunate unforeseen life events.
To create a sinking fund.
Is an account set aside deliberately for specific goals with a designed timeline.
The fund helps you to sort out for things you don’t want to pay for in a single month’s budget like Junior school fees, buying a car, saving for vacation, budgeting for Christmas gifts or wedding expenses.
How to choose a good Money market Fund
- Fund size – offers stability and a peace of mind knowing the strength of the fund
- Easy to access – The more the Fund Company embraces technology to have an easier onboarding and withdrawal the better.
- Longevity – experience is the best teacher.
- Publication of the interests in the local dailies’ - to help clients keep tabs with the investment environment.
Money market downside/risks
- Rates are not fixed – The rates are affected by the market forces and keep changing from time to time.
- Inflation - Because they are low risk in nature and invested in conservative instruments like T-bills, a situation where we have a runaway inflation crisis, it might affect the fund returns where they are lower than inflation.
- The government might default on bonds payments - On very extreme circumstances like Ghana Bond crisis the government might fail to honor its promise on interest payments and this might adversely affect the funds that for a long time have been deemed Low risk.
- Default on Bank deposits - 2008 case study of the Lehman’s Brothers - The Fourth largest bank in the unites states that filed for bankruptcy and defaulted on interest payments and deposits. Another prime example is our very own Chase Bank.
2023 is a case study where the first three months of the year inflation has been above 9%.
TAKE AWAY
In investing- manage your expectations, it does not turn out to an overnight success but will require discipline and consistency.
Ksh 10,000 will earn you ksh 75 on the first month….at the same time ksh 10,000,000 will earn you ksh 75,800 on the first month. The difference is the willingness to build on capital and have a continuous flow of passive income.
Every investment has some level of risk exposure, your appetite towards levels of exposure will put you to your investment vehicle.
At Lukas Actuarial & Insurance solutions will are always available to guide you on what options to choose by offering free advisory. We specialize of 4 pillars of personal finance – Investment, saving and protection, health insurance and retirement.
‘form ni kujipanga,blanda ni kuretire bila kakitu’ – nelson Lukas
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