A money market fund is an investment vehicle that collects money from several investors and puts it in money-earning instruments. MMFs are popular with first time investors for many reasons. For starters, you don’t need too much money for capital – some fund managers will let you start with as little as Kshs. 1,000 and top up whatever amount you have. This means that everyone can invest. MMFs also attract competitive returns. Cytonn Money Market Fund, the highest yielding MMF in the country offers an average annual interest of 11%. This is much higher than most savings accounts will earn you. However, MMFs are also very liquid, which means you can easily withdraw your money whenever you need it. While this is a perk for most people, if you are a long-term investor, you probably prefer for your capital to be less accessible so that it can continue to grow. Should this stop you from getting a money market fund account?
Interest in a money market fund is compounded daily and paid at the end of each month. If you keep topping up your investment and leave it untouched, it will continue to grow. Say for example, you and a friend open MMF accounts at the same time. Your friend puts in Kshs 5,000 and leaves it at that. You, on the other hand, start with Kshs 1,000 and then you top up your account with Kshs 500 at the end of each month. After one year, you will have earned more interest than your friend who started with more but did not make any top ups. In addition to that, because you do not withdraw your capital or the interest it earns, the principal amount grows faster because of the magic of compound interest. The longer you leave the money untouched, the more it grows.
In addition, long-term investors require stability. You want the assurance that your money is safe as it grows. MMFs attract less risk than many other investments, including real estate, futures and high-income bonds. They also give more competitive returns than other low risk investments such as bank accounts and government bonds. This makes them an attractive option for diversifying your portfolio. They are also great for long-term investors with a low risk appetite.
So how do you eliminate the temptation to access your capital when it is not necessary? For starters, leave clear directions with your fund manager to reinvest whatever interest your capital earns. This will force you to wait to enjoy your returns much later, after it has grown substantially. Secondly, you can leave a standing order at your bank instructing them to send a certain amount from your current account to your MMF account each month. This ensures you are topping up your investment automatically. More importantly, it gives a long-term view to your investment because you are always putting money into your MMF account, not taking it out.
In conclusion, MMFs are a good option for all kinds of investors. While they favour those with a short investment horizon, they can also be very rewarding to long-term investors, especially with some discipline. Aside from offering competitive returns, they also require a low initial investment and monthly top ups. To find out more about the Cytonn Money Market fund, visit here.