When investing in Kenya, money market funds (MMFs) and government bonds can be attractive options for investors looking for relatively low-risk investments with regular returns.
However, key differences between these two investment vehicles can make one a better choice than the other depending on an investor's specific goals and risk tolerance.
Money Market Funds
First, let's take a look at money market funds. MMFs are mutual funds that invest primarily in short-term debt securities, such as treasury bills and commercial paper.
These funds are considered low-risk investments, as the securities they hold are typically issued by the government or highly rated corporations and are likely to be paid back on time.
Additionally, MMFs are highly liquid, meaning that investors can easily buy and sell shares in the fund daily.
One of the main advantages of investing in MMFs in Kenya is the relatively high yields these funds can offer.
According to the Central Bank of Kenya, the average yield on a 91-day treasury bill as of December 2020 was around 5.5%, which is higher than the yields of many other low-risk investments.
Additionally, MMFs can be a valuable tool for investors looking to manage cash flow and earn regular returns, as the dividends paid by these funds are usually distributed monthly or quarterly.
On the other hand, government bonds are debt securities issued by the government, typically with a maturity of more than one year.
When an investor buys a bond, they essentially lend money to the government in exchange for regular interest payments and the return of the principal at maturity.
Like MMFs, government bonds are considered low-risk investments as the government is highly likely to pay back the bond on time.
One of the main advantages of investing in government bonds in Kenya is the relatively low volatility.
Because the government cancan taxes its citizens and print money, it is less likely to default on its debt than a private corporation.
Additionally, government bonds can be valuable for investors looking to diversify their portfolios and manage interest rate risk.
When comparing MMFs and government bonds, it's worth noting that both types of investment have specific advantages and disadvantages.
For example, MMFs typically offer higher yields than government bonds but also have higher expenses and management fees.
On the other hand, government bonds are less volatile than MMFs but have a lower potential for growth.
In summary, whether investing in money market funds or government bonds is better in Kenya depends on an investor's specific financial goals, risk tolerance, and investment horizon.
For investors looking for high returns and regular cash flow, MMFs may be the better choice.
On the other hand, government bonds may be the better option for investors looking for low volatility and a way to diversify their portfolios.
Ultimately, investors should consult a financial advisor and conduct their research before deciding.