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MONEY TALKS: How to compute the interest on your money market fund account

Tuesday April 30 2019

After sharing stories about investing in money market funds, a handful of you wrote in with questions about interest rates. PHOTO | FILE

After sharing stories about investing in money market funds, a handful of you wrote in with questions about interest rates. PHOTO | FILE 

BETT KINYATTI
By BETT KINYATTI
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I told you in a story before how I’m saving and investing in a money market fund, right? I also told you which questions you must ask before you open yourself an MMF account.

After sharing these stories, a handful of you wrote in with questions about interest rates. Questions like, how much interest will I earn from my savings? How much should I expect at the end of the month? What rate do they use to calculate the interest? Can I withdraw that interest?

I’ll answer all these questions in this story.

STUFF TO REMEMBER

I’d like you guys to take these important things to mind about the MMF:

a) It’s a low-risk savings and investment option: Which means it earns little in interest income. It’s more a security account than an investment vehicle. I think of mine as a halfway house – money is here waiting for a while, before it gets en route to its final investment destination.

The MMF falls under the investment umbrella of unit trusts. There are other investment options under the unit trusts you can explore. They’re higher risk therefore have higher returns. We’ll talk about each one in detail another day.

b) Your capital is not toyed around with: The fund managers don’t toy around with your capital i.e. your initial investment. It’s, ahem, preserved. Your capital either grows or shrinks as you pump in or withdraw money

c) Interest is compounded: The interest earned today is added to the interest earned yesterday, rolled forward and it becomes the new interest for the next day. At the end of the month, this cumulative balance is credited to your account. Does that make sense?

d) The interest rate is an annual rate: To get the interest earned daily, then you must divide this annual rate by 365 (days). This rate ought to be net of the fund manager’s management fees.

Some fund managers gross this fee into the interest rate. Others don’t. Remember to ask your fund manager how they treat theirs.

e) Caesar takes what is owed to Caesar: At the end of the month, your cumulative interest earned in those 30/31 days is knocked down with withholding tax of 15 per cent. This goes to the government.

COMPUTING INTEREST

I have an active MMF account with an insurance company.

I’ve been running the account since July 2018.

I send money to it monthly, and withdraw when I have an emergency.

I asked my insurance company to send me a breakdown of the daily interest earned on my account for the month of March 2019.

I’ll use this breakdown to show you how your money makes money.

Funds managers rely on their IT systems to compute the interest and whatnot – minimal manual intervention minimizes the risk of errors and inaccuracies.

I checked their system rates with the rates they published in the Daily Nation: On some days they tallied, other days they didn’t.

For example, on March 27th, 2019, the Daily Nation rate was 7.59 per cent, the insurance company system’s rate was 7.575 per cent.

On March 5th 2019, the Daily Nation rate was 7.34 per cent, the insurance company system’s rate 7.48 per cent.

I’ll investigate this and get back to you.

I’ll run with what the insurance company sent because this is what ends up in my account, anyway.

Pay attention, people.

Date

Daily rate %

Capital

Shs.

Running balance

Shs.

Daily interest Shs.

Cumulative interest

Shs.

01-Mar-19

7.60%

                 180,003

180,002.85

37.46

37.46

02-Mar-19

7.60%

 

180,002.85

37.46

74.92

05-Mar-19

7.48%

 

180,002.85

36.91

186.90

07-Mar-19

7.54%

             15,000

195,002.85

40.3

264.29

08-Mar-19

7.50%

 

195,002.85

40.06

304.35

14-Mar-19

7.68%

(20,000)

220,453.85

46.39

562.45

31-Mar-19

7.82%

 

220,453.85

47.23

1,347.91

 

 

 

 

1,145.73

 

LET’S TALK NOW

It makes sense, doesn’t it?

If you rework the figures using their interest rates, you’ll hit the nail on the head.

This also includes the cumulative interest that was credited to my account at the end of the month, the one net of 15 per cent withholding tax.

I made some more deposits after March 8th 2019, then the withdrawal on March 14th 2019.

The customer care desk at my insurance company sent me this breakdown on request.

I simply told them I want to see how my account is performing daily and I’d like a system breakdown. I asked for it at lunchtime, it was emailed by sunset.

You can do the same with your MMF account. As I mentioned in the past, it’s your money you’ve entrusted them with it. Check in every so often to make sure they’re managing it as they promised you they would.

***

Do you have questions for the writer? E-mail: [email protected]

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