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If you have invested in Money Market Fund (MMF) or monitored the trend, you may have noticed that the returns have been falling in recent months, making it less lucrative than it was in the preceding months.
Experts attribute this decline to a number of factors including declining interest rates, reduced Treasury Bill (T-bill) yields, and falling inflation.
The trend is projected to continue in the coming months, with Treasury CS John Mbadi assuring Kenyans that while investors in the MMF may find it less lucrative due to the declining returns, it is good for the economy.
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Regulated by the Capital Markets Authority (CMA), MMFs invests in a well-diversified portfolio comprising treasury bills, corporate notes, bank fixed deposits among others with a relatively low-risk to investors making them a popular choice for anyone who wishes to make their money grow.
READ: 7 factors to consider before investing in a money market fund
Treasury Bills & its impact
One of the ways in which the government borrows money from investors is through Treasury Bills (T-Bills) which are short term debt securities issued by the Central Bank of Kenya and mature within a reasonably short time of 91, 182, or 364 days.
With T-Bills making up a large chunk of MMF, the interest rate offered by the government on them have a direct impact on MMF returns.
Kenya has witnessed significant changes in its finance ecosystem, resulting in a steady decline in T-Bills interest rates.
Treasury CS John Mbadi explained that interest rates on T-Bills has dropped from 15 percent in August last year to less than 9 percent with investors in MMFs feeling the pinch, adding that this is good for the economy.
READ: 6 downsides of SACCOs in Kenya you should know about before joining one
Interest rates have been going down, especially the rate at which the government borrows (T-Bills). When I came into office, the rate was 15 per cent. Right now, it is going below nine per cent, going to eight for 91-day T-Bills.
So money market (funds) is not as lucrative as it used to be. I know some of you who have been into MMFs are wondering what the government is going to do. It is better for the economy as a whole but it may not be good for an individual investor.
Central Bank Rate
In a bid to stimulate economic growth and make borrowing more affordable, the Central Bank of Kenya has over the last few months reduced the Central Bank Rate to 10per cent.
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Given that MMF typically invest in short-term government securities whose yields are sensitive to central bank policies, this drop in rate has had a similar effect of MMF returns.
Inflation
Reduced inflation tends to result in reduced interest rates and Kenya has recorded a decline in inflation over the last year with mitigative measures put in place by the government yielding results. Although there was a minimal increase in inflation in April, the same has not resulted in any substantial increase in interest rates.
With low interest rates, MMF returns have continued to exhibit the same trend.