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Home Investments

MMFs or T-Bills? Understanding short-term investment options in Kenya

Faith Ndunda by Faith Ndunda
January 29, 2025
in Investments
Reading Time: 2 mins read

Investors in Kenya seeking safe, short-term investment options often consider Money Market Funds (MMFs) and Treasury Bills (T-bills). While both are relatively low-risk, they differ in liquidity, flexibility, diversification and returns.

 MMFs are highly liquid, allowing investors to access their funds immediately or within two days of requesting a withdrawal. This quick access makes MMFs an attractive option for those needing high liquidity. In contrast, T-bills are not as liquid. Investors must wait until the maturity of the bill to access their funds, as T-bills are not traded on the secondary market like T-bonds. However, with tenors ranging from 91 days to 364 days, T-bills still score relatively high on liquidity compared to longer-term investments.

MMFs are more flexible than T-bills with freedom to invest anytime and any amounts. T-bills however require participation in weekly auctions, with a minimum investment of KES 50,000.0. This requirement can be a barrier to some investors, particularly those with smaller amounts to invest.

Diversification is a key strategy for managing risk. MMFs typically invest in a mix of T-bills, call deposits, fixed deposits and commercial paper. This diversified portfolio can offer a balanced risk profile but also exposes investors to the credit risk of commercial paper and bank deposits. In contrast, investing directly in T-bills means putting money into a government-backed, low-risk instrument, less diversified option.

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MMF rates fluctuate daily depending on the market conditions. When interest rates are high, MMFs may offer higher returns. However, returns fall when interest rates decline. T-bills provide a fixed return until maturity, offering stability and predictability. This fixed return is advantageous when interest rates are falling but disadvantageous when rates are on the rise.

Some MMFs outperform T-bills. Fund managers, pooling large sums of money, can secure higher returns on T-bills and T-bonds through competitive bids. They also invest in fixed and call deposits, which can yield slightly higher returns than T-bills. MMF investments compound daily or monthly, offering potential for higher cumulative returns over time.

Both MMFs and T-bills have their unique advantages and risks. MMFs offer greater liquidity and flexibility but come with varying returns and potential exposure to higher-risk assets. T-bills provide predictable, low-risk returns but lack the liquidity and flexibility of MMFs. Investors should consider their individual financial goals, risk tolerance and need for liquidity when choosing between these two investment options.

 

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