Pros and Cons of Money Market Funds

 

I love the fact that Kenyans are increasing their literacy when it comes to Finances.

It is good to hear many people asking after MMFs and other asset classes.

I would like to explore a few pros and cons of this asset class in this article

Pros

Ease of liquidity. It is so straight forward that you can deposit money today and request for it after three days and it will be readily available much like a regular bank account. This makes it ideal for money you need to access speedily. Unlike the bank which will keep your money at little to no benefit to you, this will give you the benefit of returns no matter how short a duration the money stays.

Ease of joining. Just like a normal bank account you will fill a form and submit your identification documents and KRA PIN. That alone will be enough to get you started once you deposit the initial amount. This varies across different providers.

Modest returns. Most of them will give you returns above 10% per annum. The returns are also compounded meaning the longer you stay and maintain discipline the more you will earn from it. This is one of the easiest ways to generate passive income.

Flexibility of contributions. You are at liberty to top up your contributions at any time with any amount though some will have a minimal top up amount.

Spread of risk in low exposure instruments. The fund utilizes call deposits, T-bills and bonds. These are low risk instruments which have little risk of default.

Cons

A challenge to maintain saving discipline because of zero safeguards. Since no one requires you to contribute regularly, you are likely to slide into indiscipline when it comes to growing your money steadily.

Ease of liquidity makes long term saving tricky-requires great restraint. Unless you are highly disciplined or put an automated system in place to grow your long term savings, you will not be able to go too far. That liquidity is a blessing and curse in equal measure depending on how you navigate it. You need to be clear on what you are saving or investing towards and if you realize the MMF is derailing your long term goals, then switch to an alternative that will make it easy for you.

Variable disparity in gross and net return. It is important to know that there is a gross and net return. There are fees and taxes applicable to the return which you need to take note of as you sign up. Think about the net return because that is what you should be expecting.

Returns Subject to market forces-applicable to majority of asset classes. While the MMF is low risk it is still subject to the movements of the market. Any shocks will touch the returns but the beauty is that this is not exclusive to MMF but affects majority of classes

Laissez faire approach to contributions takes away predictability of position. It is difficult to predict your own growth as an investor except you put in safeguards in the form of automated savings.

To choose or not to choose MMFs as an investment vehicle? That depends on your goals and aspirations.