Money market funds (MMFs) are short term financial instruments with low risk, moderate interest rates, and offer security to savings/ funds invested. Funds invested can be for emergency savings, asset savings, etc. In the Kenyan financial landscape, there exists several MMFs such as the Cytonn MMF offering medium-high interest rates of about 13.9% etc. Diversification of funds in MMF seeks to reduce the risk while enhancing potential returns for the investor. It involves active investing in various short-term instruments by fund managers on behalf of investors.
A common saying relating to diversification is always “do not put all your eggs in one basket”. A good fund manager will seek to invest in a variety of short-term debt instruments such as Treasury Bills and Bonds, commercial paper etc. Treasury Bills and Bonds for example, pose the lowest risks of default in the market as they are offered by the government.
Additionally, diversification is achieved by investing in various maturity periods. MMFs usually are short-term instruments with typical periods of 12 months or less. For example, funds can be invested for overnight, 91 days, 182 days and 364 days; that is for Treasury Bills in the Kenyan yield markets. This mitigates the liquidity and interest rate risks. Having a mix of short-term maturities reduces the sensitivity of the funds with fluctuations of interest rates compared to holding for longer periods.
Considering the credit rating is also vital when investing. MMFs generally invest in high quality investment securities to maintain a low volatility outlook. Diversification across different credit rating scores within the limits of the investment policy can potentially enhance the yields, as well as maintain a desirable level of volatility.
MMFs can further achieve diversification through juggling across different industries with slightly different risk-return characteristics. For example, a fund may hold investment in another collective investment scheme or commercial paper, diversifying across various industries such as technology, service, manufacturing etc.
Understanding diversification of a particular MMF can give insights through examining regular reports of the fund’s portfolio details, reviewing the fund fact sheets provided publicly often on a monthly basis, or researching the fund manager’s industry experience, and investment approach to determine his philosophy. Generally, investing in a MMF means relying on a fund manager who employs diversification strategies, making MMFs a relatively safe option for short-term investments.
