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Risks Associated With Money Market Funds (MMFs)

Money Market Funds (MMFs) are a popular investment option within Kenya, with data from their regulator, the CMA (Capital Markets Authority), showing the growth of funds invested increased by billions of Kenya Shillings in the first quarter of this year as compared to the end of 2023.

 

Money Market Funds (MMFs), with all their benefits, including lowering the amount needed to start investing, carry some risks.

 

The risks include:

 

Credit Risk: Money Market Funds (MMFs) can invest by lending money to, for example, the government that pays back the amount loaned to it with interest after a set period.

 

Though small, there is a risk that the entity the Money Market Fund (MMF) lends to defaults in payment, which may lead to you losing the amount you invested with them.

 

You can try to reduce this risk by working with Money Market Fund (MMF) providers registered by the CMA (Capital Markets Authority) as you keep an eye on, for example, what credit rating agencies (institutions who give predictions on the ability of governments and companies to pay back debt) are saying regarding the ability of the institutions the Money Market Fund (MMF) you choose is investing in, in terms of paying back their debt.

 

Interest Rate Risk

The highest returns among Money Market Fund (MMF) providers are heading toward the 20 percent mark, a massive shift from single-digit interests seen not so long ago.

 

Such returns may not be sustainable in the long term, which may impact how much interest Money Market Fund (MMF) providers are willing to offer, a shift that can determine how much you can earn off such investments.

 

Inflation Risk

Inflation is about how much money loses value over time, a state characterized by price increases of products and services.

 

Related Article: What Is Inflation?

 

Choose Money Market Fund (MMF) products that, at minimum, keep up with the inflation rate to prevent your investment from losing value.

 

Liquidity Risk

Several Money Market Fund (MMF) providers allow withdrawal within hours, making it generally a liquid investment.

 

There are instances when market volatility can cause Money Market Fund (MMF) providers to limit withdrawals.

 

Related Article: What Is A Money Market Fund (MMF)?

 

Overall, Money Market Funds (MMFs) are a good investment for many investors, especially those with a low-risk tolerance.

 

Educate yourself about investments, and only invest in what you understand.

 

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