Ever wondered how different fund management companies manage to offer attractive returns? In this article, we delve into the world of fund management and give you insights on how fund managers invest your monies to give you an above-average rate of return.

First, a brief introduction – A fund manager is an institution that manages Investments on behalf of its investors with the aim of ensuring capital preservation and interest rate is earned on the clients’ Investment. All fund managers in Kenya must obtain a license from the Capital Markets Authority after meeting the certain set criteria (CMA collective Investment schemes regulation https://bit.ly/32B82Ud)

In most cases, the fund manager charges a management fee for the management services rendered to the Investor. Money market fund managers invest the funds in different financial or investment instruments in varying the percentage fund allocations to a given instrument.

Read more on Understanding money market investments in 5 steps

The instruments are determined by key factors such as risks involved, liquidity, rate of return, and regulations by the Capital Markets Authority (CMA). Generally, a money market fund manager invests in debt securities that offer low risk, liquidity and flexibility. Some of the most common instruments are:-

  1. Government securities-These are considered as risk-free investments and provide the Investor with a fixed return over an agreed-upon time period. These can be either treasury bills or bonds and are differentiated by the rates offered and duration of the investment. (Treasury bills are short-term, with maturities of 91 days, 182 days and 364 days whereas treasury bonds are medium- to long-term investments, and their maturity can range from one to 25 years). 

    In a nutshell, fund managers loan out the consolidated funds to the government with repayment in return done upon maturity- which trickle down to the Individual MMF Investor.
  2. Commercial papers-This refers to unsecured, short-term debt instruments floated by corporations to enable them meet their short term liabilities or current assets needs. They are less secure compared to government securities thus give higher rates of return.

    As a consequence, majority of fund managers have in place a thorough research, analysis and investment policy statements among other systems aimed at mitigating risks involved when investing in commercial papers.

  3. Real Estate- Some fund managers allocate a portion of the funds under management to the real estate- i.e. loaning out to real estate investment companies in exchange for an agreed-upon interest rate of return.

  4. Bank deposits –This involves fund managers lending money to the banks over a given time period in exchange for a given interest paid by the bank. It’s simply loaning to banks. This is an instrument fund managers make use of due to the relatively lower risks involved.

Others include Company Shares, Private Offers, and Offshore Investments.

What’s crucial is to maintain the risk of the investment to minimum levels while at the same time offering above-average returns to the investor.

Abel Kemei

The Capital Markets authority plays a major role in the regulation of how fund managers structure their investments across different instruments to protect you – the investor. The table below shows the various limits of the book value of the investments of a collective investment scheme – under which Money market funds falls-:

NoSecurity/InstrumentPercentage (%) Limit
1Securities listed on a securities exchange in Kenya80%
2Securities issued by the Government of Kenya80%
3Immovable Property25%
4Other collective investment schemes including Umbrella Schemes25%
5Any other security not listed on a securities exchange in Kenya25%
6Off-shore investments10%

Source-Capital Market Act Chapter 485 A

Conclusion

You might wonder why it’s harder to directly invest in these instruments without going through the fund manager. Well, factors such as economies of scale, expertise, industry experience and good access to key industry players make them a better proposition.

Money market funds have low risk and give above average returns thus being one of the best ways to save your money. This is because of the regulation by the Capital Markets Authority and diversification of the instruments Fund Managers invest in.

To learn about fund managers, read What to consider when choosing a fund manager.


This article was written by Abel Kemei, Chief Risk Officer at Vasili Africa.

Get in touch with Abel for free investment advice via info@vasiliafrica.com or fill in your details below.