Money market funds set to regain appeal amid tight liquidity

 

The I&M Bank building in Nairobi. The lender has discontinued debit and credit card-backed online transactions. PHOTO | FILE 

Opinion and Analysis

By RUFUS MWANYASI

For the past several months, investors have witnessed short-term interest rates rise steadily to levels last seen in late 2011.

Last week’s 91-day Treasury bill fetched Sh4 billion at a staggering 20.6 per cent, up from 18.6 per cent the previous week and 8.5 per cent since January.

Likewise, 182 and 364-day Treasury bills have risen to 20.3 per cent and 20.6 per cent respectively, up from 10 per cent and 10.6 per cent respectively since January.

Obviously, a combination of tight liquidity (interbank rates are now over 20 per cent), increasing government funding needs and rising rates have caused the rapid rise in the short-term rates.

If rates remain at these lofty highs, how can retail investors take advantage of the situation?

The answer should be money market funds. These investment vehicles provide advantage, particularly in the current environment.

Money market funds are mutual funds that invest in very short-term debt issued by governments and large companies. They act like banks, taking in deposits and guaranteeing the return of the invested principal at any time, all while paying an interest income return to its investors.

Because of their low-risk holdings and their low susceptibility to changes in interest rates, money market funds are liable to offer unit trusts at the net asset value of Sh1 and can strive to maintain this stable value, assuring investors of little risk to their principal.

There are about 18 licensed money market funds in the country.

Historically, when rates start moving upward, money market funds yields quickly follow, unlike those of bank savings and deposit accounts, which can lag.

With tight liquidity in the market, money market funds are likely to regain appeal as interest rates stay high or continue moving higher.

Assuming an average yield of just 12 per cent this year – an investment of Sh10,000, will return a gross return of Sh1,200— not a small return considering that the equity market is down nearly 20 per cent.

Bank savings and deposit rates do not match up either at averages of 1.37 per cent and 6.3 per cent respectively. For investors yearning for protection against the current instability in the stock market and seeking more yield than a fixed-deposit account, short-term money market funds are a good option.

Since investing directly requires a minimum of Sh100,000, money market funds remain ideal for investors with less amounts. This route also offers investors the ability to buy and sell at any time instead of waiting for the full three to 12 months when one is invested directly in the Treasury bills.

Nonetheless, while such funds respond quickly and positively to rising short-term rates, the same needs hold true for rate declines.