Fixed Income Funds vs Money Market Funds

If you have KSh100,000 to invest, should you choose a money market fund or a fixed income fund?

What do they have in common?

Both products pool money from many investors and have them professionally managed. The Capital Markets Authority (CMA) regulates collective investment schemes in Kenya.

Money Market Funds: for liquidity and shorter-term needs

A Money Market Fund (MMF) primarily invests in short-term, interest-bearing instruments. Kuza says its KES Money Market Fund invests in bank call and fixed deposits, Treasury bills, short-term Treasury bonds, corporate bonds, commercial paper and other collective investment schemes.

Etica says its KES Money Market Fund aims to provide current income while protecting investors' capital and maintaining liquidity.

However, "low risk" does not mean risk-free. Returns can change with market conditions, interest rates and the underlying investments.

Fixed Income Funds: a different approach

Fixed income funds invest in interest-bearing securities and can have exposure to medium- and longer-term debt instruments.

Etica's Fixed Income Fund is a separate product from its Money Market Fund and has its own investment strategy, fees and performance.

Because fixed income funds can hold longer-term securities, they can be more sensitive to interest-rate movements. When market rates rise, the value of existing bonds can fall.

So, a fixed income fund should not automatically be considered a safer version of an MMF.

Fixed Income Funds vs Money Market Funds

Alt text: Comparison infographic showing Fixed Income Funds vs Money Market Funds, covering focus, typical use, interest-rate sensitivity, risk, liquidity, and returns.

Context is everything. Stay ahead of shifting trends with today’s market updates, and uncover emerging opportunities using the Serrari Group Market Index and Marketplace. Then, take control of your own financial future by exploring our Money & Life Reset Transformation Blueprint ™ to build stronger habits, create better systems, and design a path toward lasting wealth.

Which can give higher returns?

MMF yields can change as short-term interest rates and Treasury bill yields change. Fixed income fund returns can also change and may reflect both interest income and changes in bond values.

Etica publishes separate yields for its MMF and Fixed Income Fund. Its website warns that past performance is not an indication of future performance and that unit prices can rise or fall.

So, don't choose a fund simply because it currently displays the highest yield.

Which is safer?

If by "safer" you mean less exposed to price movements, an MMF will generally have lower interest-rate sensitivity because it focuses on shorter-term instruments.

But the question "are fixed income funds more safe to invest in?" has no universal yes-or-no answer. Risk depends on the specific fund and its underlying investments.

What about access to your money?

Liquidity is another important difference.

MMFs are generally designed around short-term instruments and liquidity, although withdrawal processing times vary between funds.

Fixed income funds can also allow withdrawals, but some may have lock-in periods or different redemption conditions.

For example, Etica states that its KES Fixed Income Fund has no lock-in period, while Kuza's Fixed Income Fund has a three-month lock-in period according to its published information.

Always check current withdrawal terms before investing.

Which one should you choose?

Alt text: Infographic showing three questions to help choose between a Money Market Fund and a Fixed Income Fund based on liquidity, risk tolerance, and investment horizon.

Ask yourself three questions:

• 1When will I need the money?

If you need relatively easy access, an MMF may be more suitable.

• 1How much price movement can I tolerate?

If lower interest-rate sensitivity is important, an MMF may be preferable.

• 1What is my investment horizon?

If you can invest for longer and accept potentially greater fluctuations, a fixed income fund may be worth considering.

For retirement, don't simply search for the best fixed income funds for retirement. Consider how the fund fits into your overall retirement portfolio, time horizon, income needs and risk tolerance.

The bottom line

Money market funds and fixed income funds can both play useful roles, but they are not interchangeable.

An MMF generally focuses on shorter-term instruments and liquidity. A fixed income fund can provide exposure to a broader or longer-duration range of debt investments and may therefore have greater interest-rate and price risk.

There is no universally best fixed income fund to invest in. The right choice depends on your goal, investment horizon, liquidity needs, risk tolerance, fees and the specific fund's strategy.

This comparison is useful, but the fund's latest documents should always guide your final decision.

Before investing, read the latest fact sheet and fund documents, verify that the scheme is approved by the CMA, and never treat an advertised return as guaranteed.

Build Your Financial Future With Serrari