MONEY TALKS: Questions to ask before you invest in a money market fund account

I’ve been saving and growing an investment in my money market fund account since July 2018. This money market fund (MMF) is with an insurance company.

Other institutions that also extend this product are investment banks, independent investment companies, and asset and fund managers.

MMFs fall under the investment umbrella of unit trusts. Apart from MMFs, there are also equity, bond and balanced funds.

Most institutions have a special name for their MMF product.

Sanlam Unit Trust calls theirs the ‘Pesa+ account’.

Alpha Africa Asset Managers call theirs ‘Kasha Money Market Fund’.

Genghis Capital Investment Company a ‘GenCap Hela Fund’.

Zimele Asset Management’s is a ‘Savings Plan’.

These terms of endearment don’t change the essence of the product. A rose by any other name is still a rose. So is an MMF.

I explained to you my experience with my MMF account in my last story. 

A handful of you wrote in with questions about what you need to set up the account. Well, apart from your ID, PIN and passport photo (I think), you also need the shrewd mind of an investor.

You need to know what goes on back there in the kitchen – you need to understand how the sausage is made.

So as you hit the streets and read investment blogs and knock on the doors of these investors for a sit-down, here are a few questions you must ask.

These questions will also let you know if the product fits into your financial ambitions, or not:

1.What’s your rate of interest?

The rate of interest is simply that – the rate at which your cash investment earns an interest.

The beauty about MMF is that your investment earns interest daily. The daily interest rate is compounded and annualised. It takes into account the number of days in the month your principal was in the account, and whether there were any additional deposits and withdrawals made. Does that make sense?

It’s a complex computation that’s also net of withholding tax and the fund’s management fees. I will break down for you in my next story. Look out for it in this space.

Anyway, the rate of interest is known as the daily yield.

The daily interest is computed on the funds in the account daily, summed and credited to your account monthly.

You’ll find this effective daily yield published ‘daily’ – from Tuesday to Friday – in your copy of the Daily Nation and Business Daily.

The rates fluctuate day to day.

I’m looking at copies of the Business Daily for April 3rd and 4th 2019.

Take CIC Asset Management. The rate was 9.46 per cent on April 3 and 9.45 per cent on April 4.

Amana Capital Limited’s was 7.29 per cent on April 3 and 7.30 per cent on April 4.

Cytonn Investment’s was 10.12 per cent and 9.98 per cent, respectively.

Next to the column of ‘daily yield’ is another column for the percentage of ‘effective annual rate’.

The effective annual rate is the compounded rate for the period. It’s like a predictive rate of the fund, some fund managers say it’s the weighted average return for the unit trust. We’ll leave that alone. Talking about it now would be throwing a spanner in the works.

I wouldn’t want to throw any spanner in anyone’s works this early in the day.

2. What’s your management fee?

What happens with the MMF, is that they’re doing the difficult work of investing the money for you: they’re selecting where your money will go, monitoring it for performance, negotiating rates, moving funds around client accounts and whatnot.

It’s a lot of heavy lifting. They’ll charge you a small fee for this heavy lifting.

Different MMFs have different rates for their management fee.

This fee is charged annually. It’s netted off your daily interest rate.

Sanlam Unit Trust, for example, charges an annual management fee of 1.2 per cent.

Britam Holdings Limited charges 2.5 per cent.

Stanlib Kenya, 1.75 per cent.

An important point: Some investment companies gross this management fee into their daily interest rate. Other’s net it off.

Make sure to ask what yours is doing with theirs.

3. Are there any other hidden charges?

Ideally, there should be none. But in this day and time of the century, it’s a valid question to ask.

The only charges that should be netted off your interest are withholding tax of 15 per cent and the effective annual management fees.

4. Am I charged for making withdrawals?

The beauty about MMF is their liquidity. As soon you as email your request for withdrawal, your cash should hit your account within three to five business days.

Some MMFs have a shorter turnaround period – say two days – but it should never exceed five business days. There’s a problem if it does. That’s a warning sign for you to investigate further, it’s a sign that the company has cash flow issues. Cash flow issues are never a good issue.

Anyway, a majority of MMFs allow you one free withdrawal a month, you are charged for any subsequent withdrawals made in that calendar month.

These are essentially bank charges you bear.

UAP Old Mutual Investment Services charges Sh800.

ICEA Lion Group doesn’t charge anything.

Genghis Capital charges Sh600.

5. What’s my minimum initial deposit and minimum additional investment?

The minimum deposit is for two things. One, to activate your account. Two, to keep your account active.

This initial deposit tells the fund managers that you’re now in business, and that your investment can begin to earn daily interest. But the moment your account balance is below this figure, then your account becomes dud.

Should you ever want to close shop and walk away with whatever you’ve earned, you’ll get back this initial investment.

Some fund managers also effect a minimum figure for the additional deposits you make to grow your account.

Again, different strokes for different folks.

CBA Bank’s minimum initial deposit is Sh5,000. Minimum additional investment of Sh5,000.

Zimele Asset Management’s is Sh100. There’s no minimum additional investment.

Dry Associates’ Kenya shilling minimum is Sh1,000,000. Minimum additional investment of Sh250,000.

6. Which instruments are you investing my money in?

MMF’s are liquid and low-risk because of the instruments your cash invests in. That is, equities, bonds and deposits.

Ask your investor to give you a breakdown of the particulars of these instruments: the name, effective interest rate, duration of investment, profits and losses made (if any), how exchange rates impact it, percentage that goes to each group of instruments and any other questions that’ll come up as you engage with these particulars.

Remember, when it comes to your personal investments, all questions are valid questions. There are no ‘stupid’ questions. So ask away.

Don’t be shy.

7. Do I get my monthly statements emailed?

This should be a resounding ‘Yes!’. It’s 2019, for Pete’s Sake, there’s no excuse for not getting your statement emailed monthly – or even on request – straight to your inbox.

I strongly suggest that you study your statement. Understand what’s going on in there – what’s coming in through your deposits and monthly interest, what rate they’re actually using to compute your interest, the date your withdrawal hit your account versus the date you emailed your request.

This is your money and you’ve trusted them with it. So study that statement so you can underscore their trust.

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