Fixed Income Funds vs Treasury Bonds

What if you have KSh100,000 to invest. You want your money to earn income, but you are unsure whether to put it into a fixed income fund or buy a Treasury bond.

Which option is better?

There is no one-size-fits-all answer. The right choice depends on how much you have, how long you can invest, how much control you want and when you may need your money.

First, what is the difference?

A fixed income fund pools money from many investors and has it professionally managed. The fund can invest in assets such as government securities, corporate bonds and other permitted fixed-income investments.

A Treasury bond is a debt security issued by the Government of Kenya. When you buy one, you are lending money to the government for a specified period. Treasury bonds generally pay interest every six months, depending on the bond's terms.

In simple terms:

Fixed income fund = invest in a professionally managed pool.Treasury bond = lend money directly to the government.

How much do you need to start?

This is an important difference.

The minimum face value for a Treasury bond is KSh50,000, with additional investments generally made in multiples of KSh50,000.

Fixed income funds set their own minimums.

For example, Etica's KES Fixed Income Fund lists a KSh100 minimum investment, while Kuza's KES Fixed Income Fund lists a KSh1,000 minimum initial investment.

Quick question

You have KSh20,000. Which option can you access based on the minimum investment?

A. Treasury bondB. Some fixed income fundsC. Both

Answer: B. Some Kenyan fixed income funds accept significantly less than the KSh50,000 minimum required for a Treasury bond.

However, a lower minimum does not automatically make a fund better.

Who manages your money?

With a Treasury bond, you choose the security you want to buy. You can consider its maturity, coupon and price before investing.

With a fixed income fund, a professional fund manager makes investment decisions according to the fund's investment strategy.

This can suit investors who prefer not to research and select individual securities themselves.

What about returns?

Treasury bonds with fixed coupons generally pay interest twice a year. However, the coupon rate is not necessarily the same as your actual investment yield because the price you pay for the bond affects your return.

Fixed income fund returns depend on the securities held by the fund and their performance. The fund's return can reflect interest income as well as changes in the value of its underlying investments.

Important: Don't compare a Treasury bond's coupon directly with a fund's advertised yield as if they are identical measures.

What if you need your money early?

A Treasury bond has a specified maturity date, but you can potentially sell it before maturity through the secondary market. The price you receive may be higher or lower than what you originally paid because bond prices change as market conditions and interest rates change.

Fixed income funds have their own redemption rules. Some may have no lock-in period, while others may require you to remain invested for a specified period.

Always ask: "If I need my money, how quickly can I withdraw it?"

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Fixed Income Funds vs Treasury Bonds

Alt text: Infographic comparing fixed income funds and Treasury bonds by ownership, minimum investment, management, diversification, maturity, access, and control.

Which is safer?

Neither should simply be called risk-free.

Treasury bonds carry the credit risk associated with the Government of Kenya. Their market price can also fluctuate if you sell before maturity.

Fixed income funds can spread investments across different securities, but their returns can also fluctuate because of changes in interest rates, credit conditions and the value of underlying investments.

So, if you are wondering, "are fixed income funds more safe to invest in?", the answer is not necessarily. Risk depends on the particular fund and what it invests in.

Which one is right for you?

Alt text: Infographic helping investors choose between fixed income funds and Treasury bonds based on management, maturity, investment amount, and diversification.

Ask yourself:

Do I want professional management?

A fixed income fund may suit you if you prefer a professional to select and manage the underlying investments.

Do I want a specific maturity date?

A Treasury bond may be attractive if you want an investment with a clearly defined maturity.

Do I have less than KSh50,000?

Some fixed income funds have much lower minimum investments than Treasury bonds.

Do I want diversification?

A fixed income fund can hold several securities, spreading exposure across investments.

What about 30-year investments?

A 30-year Treasury bond and a fixed income fund are not the same thing.

The CBK issues Treasury bonds with maturities of up to 30 years, depending on the securities offered.

A fixed income fund does not mean that your individual investment has a 30-year maturity. The fund manager decides which securities to hold according to the fund's mandate.

The bottom line

Choose a fixed income fund if you value professional management, diversification and potentially lower entry requirements.

Consider a Treasury bond if you want direct exposure to government debt, scheduled coupon payments and a defined maturity date.

Neither is automatically the best fixed income investment. Your decision should consider your investment amount, financial goal, time horizon, liquidity needs, fees and risk tolerance.

Before investing, check the latest fund fact sheet or Treasury bond prospectus and confirm the current terms directly with the fund manager or CBK.

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