Why you shouldn’t ditch MMFs despite the falling returns

Liquidity first, returns second

MMFs, by design, are not meant to compete with growth assets. Their core purpose is to preserve capital, maintain liquidity and protect purchasing power, a distinction that often gets blurred when investors compare asset classes purely on returns.

According to Elizabeth Irungu, chief executive of Absa Asset Management, MMFs should be judged by a different standard altogether, especially when they are used for short-term financial needs.

“One of the objectives in investing is first to retain your capital and beat inflation, that means your money is never idle at any one time. The return is not your number one consideration as an investor,” Ms Irungu says.

With inflation in Kenya hovering around 4.5 percent, she explains, any return above that level ensures money is working harder than the shilling is losing value. “That’s really why you would get a MMF,” she says.

Ms Irungu is clear that MMFs are not substitutes for growth-oriented investments. Rather, they play a defined role within a diversified portfolio.

“For example, if you are saving toward retirement, you need equities because that’s where capital is multiplied through capital gains rather than interest income. That is how wealth is built,” she says.

Similarly, long-term goals such as saving for a child’s university education, especially if the time horizon is more than a decade, demand exposure to assets that can compound over time.

“A money market fund would not be an option in that case. You want your money in a place where it can grow and compound,” she says.

Age also influences suitability. For investors in or past retirement, MMFs become more relevant as the capacity to withstand market volatility diminishes. “At that age, the ability to withstand ups and downs in markets especially like equities may not be as resilient,” Ms Irungu says.

What underpins MMF stability

The relative stability of MMFs, particularly during periods of market stress, comes down to what they invest in.

“The ideal way of investing for MMFs is definitely to look for short-term investment securities that are interest-earning and have very low credit risk,” Ms Irungu says.

These include bank deposits and fixed deposits spread across commercial banks with different risk ratings, as well as Treasury bills and short-term government bonds, typically capped at two to five years.

MMFs may also invest in commercial paper — short-term lending to corporates — though counterparty selection is critical. “Commercial papers are not bad, but selection of the counterparty is very important,” says Ms Irungu.

Read: Special funds dilute dominance of money market funds

Some funds also hold credit-linked notes structured by banks to offer short-term exposure to longer-dated instruments such as Eurobonds.

“This allows you to avoid buying a 10-year bond directly and instead hold a one- or two-year instrument that draws returns from it. It’s a derivative structure curated around another instrument,” says Ms Irungu.

This conservative asset mix allows fund managers to offer high liquidity, often enabling investors to access funds within 72 hours without disrupting the portfolio, a defining feature of MMFs.

The overlooked cost

As investors move away from MMFs in search of higher returns, they often underestimate the risks they are taking on.

“Every return comes loaded with a risk element. Higher returns often mean higher credit risk, the risk that you may not be paid,” Ms Irungu says.

Volatility is another frequently overlooked factor. “People forget that prices that rise sharply can also fall just as significantly,” adds Ms Irungu.

Kennedy Monyoncho, a director at Enwealth Financial Services, says the appeal of MMFs lies less in yield and more in flexibility, a benefit many investors only appreciate when it is gone.

“MMFs have a level of flexibility that is very different from traditional products like savings or current accounts,” he says. “If I can access my money as and when I need it, I would rather have that than lock it away in a fixed deposit for three, six, or 12 months.”

Unlike fixed deposits and some insurance-linked products that restrict access, MMFs allow investors to earn interest while retaining control over their capital.

“That flexibility is the trade-off for accepting a slightly lower yield,” Mr Monyoncho says.

Using MMFs intentionally

Mr Monyoncho cautions that MMFs only function as effective financial buffers if investors structure them deliberately. “MMF does not automatically become a buffer unless you deliberately make it one,” he says.

He illustrates this with a simple cash-flow example. “If my monthly spend is about Sh100,000, and I want a buffer of Sh50,000 per month, then I need an investment that generates Sh600,000 a year,” he says. “If that return represents about 10 percent, then I need roughly Sh6 million invested in MMF.”

For investors considering reducing their MMF allocation, he advises gradual adjustments guided by clear goals rather than abrupt exits.
“Your goals determine your investment mix,” he says. “If you’re planning to raise funds for a house deposit in 10 years, I would rather you tilt more toward equities.”

Einstein Kihanda, chief executive of ICEA Lion Asset Management, says decisions around MMFs should start with understanding their purpose and structure.

Liquidity, he argues, often overrides yield. “You may be chasing returns, but if you cannot meet the liquidity needs, then you defeat the entire purpose of a money market fund,” Mr Kihanda says.

Equities and fixed income funds, by contrast, are built around different risk-return dynamics — from issuers’ ability to meet obligations to companies’ earnings capacity and capital gains potential.

“The mistake is looking only at the yield and forgetting the overriding market levels,” he says.

Backbone of short-term capital

Victor Marangu, chief executive of WealthPro Africa, frames MMFs more bluntly.

“Most investors misunderstand MMFs. They are not long-term investments. They are short-term liquidity plays,” he says.

He describes MMFs as an upgrade to traditional savings accounts. While bank savings typically earn 4 to 5 percent, MMFs generate between 8 and 12 percent, helping investors preserve value over the short term once inflation is considered.

“At those levels, you’re not necessarily growing wealth, but you’re protecting it,” Mr Marangu says.

MMFs also serve as a staging ground for larger investments. Of the more than Sh600 billion invested in collective investment schemes in Kenya, he notes, roughly Sh400 billion sits in MMFs.

“If you’re chasing high returns, you’re using the wrong tool,” he says. “MMFs are about liquidity, capital preservation and discipline — not speculation.”

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