Financial Tips: What Are Mutual Funds?

One of the dependable ways of creating passive income is through building a sustainable portfolio income of paper assets – investments literally on pieces of paper that define ownership of assets such as shares, mutual funds, stocks and government securities. This article examines mutual funds as part of the paper assets. Mutual funds comprise a pool of funds collected from investors for the purpose of investing in securities like stocks, bonds, money market instruments etc. Also called unit trusts because one buys a fraction or unit costing kshs. 100 or multiple units. They are operated by professional fund managers who invest the funds’ capital to produce capital gains based on market trends.

 

Mutual fund providers in Kenya include Britam, Old Mutual, Zimele, CIC, UAP, Amana etc. Interests per annum varies according to market forces – for instance 5 - 12%. They are run professionally by experts who give small investors access to diversified portfolio. They are open-ended and affordable; one can invest with Ksh. 1,000 or Kshs. 10,000 and liquidate at market value any time.

 

Unit trusts come in different shades: Money Market Fund (MMF), Balanced Fund (BF), Equity Fund (EF) etc. MMF is preferable to low risk takers with good returns in the short-term while BF is for people with medium risk appetite and gives a high yield while EF is for aggressive high risk takers with high yields in the long-term. MMF invests in market securities, preserves your capital (guarantees safety of your money, and gives a return comparable to prevailing market rates. The fund invests in interest-bearing securities and other short term money market instruments. Thus MMF is a low-risk investment offering high yield, income stability and immediate liquidity. It has 0% entry fee and an annual management fee of about 2.5%.

 

BF is suitable to investors who seek to invest in a balanced portfolio offering exposure to all sectors of the market. It invests in listed equities and fixed income securities. It has a bias towards equities offering long term value and may have a maximum of 10% direct and/or indirect exposure to offshore investments as hedge against inflation. It is preferable to medium risk investors with an initial fee of 2% and annual management fee of 2.5%. EF is suitable for investors seeking long term capital growth in their portfolios as it aims to offer superior returns over the long term by maximizing on long term capital growth. It invests on companies listed in regional stock exchanges with above average prospects for future growth. It may have a maximum exposure to offshore investments. The initial fee is 2% and annual management fee of 2.5%. The fourth category is the Bond Plus Fund which is suitable for low-risk investment offering high yield and income stability. The initial and annual management fees are similar to the previous ones.

 

What are money market instruments?

These are short-term securities like treasury bills (money you lend the government), bonds (money you lend your government for 2- 30 years) or commercial paper (money you lend financial-institutions).
 

T-bills are more common and arguably more secure. You bid or buy or sell through a broker, bank or finance house. Sold bi-weekly and reported in newspapers, the CBK website. Interest rates are not fixed but fluctuates based on demand (volume of bids/offers) and supply (amount offered by central bank). MMF invests in such securities.

It is important to note that to determine your risk profile or appetite you need to establish your saving plan, investment goals and develop an investment strategy. Now you know where you can safeguard and invest your savings!

 

For further inquiries, consulting a financial expert on mutual funds would be helpful. However, agents of financial institutions are not reliable because they are sales agents whose aim is to sell the products that their respective financial institutions are keen to market

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