Personal Finance: The four things to check while selecting a mutual fund

Before you select a fund, find out where it invests. PHOTO| POOL

What you need to know:

  • Before you select a fund, find out where it invests. The safety or riskiness of a money market fund is to a large extent determined by its asset allocation.
  •  David :The safest money market fund is that with the highest percentage of its fund invested in treasury bills.
  • Look at the fund manager's history with customer service and years of operation. You can tell how stable a fund is by checking the kind of brand that backs it

Over the past two years, Kenyans who invested their money in the Amana Capital's money market fund have not been able to make any withdrawals. In fact, it is now safe to say that these Kenyans have lost over Sh200 million they had saved with the fund. 
Beatrice Kanyeki is one of these Kenyans. Between 2014 and mid-2018, she invested Sh1.2 million in the fund. "I was told I would earn more interest and be able to access my money whenever I needed it," she says. She started saving through Amana. During three different occasions, Beatrice was able to withdraw up to Sh400,000 on short notice. It would take three days for her withdrawal applications to be processed and the money to reflect in her bank account. 
But in January 2019, Beatrice was shocked when she couldn't withdraw from Amana. "I wanted to pay for my kids' school fees and lease land," she says. Beatrice was told that Amana had frozen all withdrawals. 
One month later, the Capital Markets Authority (CMA) placed a 28-day freeze on the withdrawal of funds from Amana. Since then, there has been no hope that Beatrice and other Kenyans who invested in Amana will recover their money. "I wish I had stuck to saving through the bank," she says.
Money market funds are one of the most revered ways of saving cash. They are secure, easy to withdraw from, and they guarantee returns. How could things go so wrong? The fall of Amana is joined at the hip with the collapse of former retail giant Nakumatt where it invested Sh275 million when the hypermarket was on its way down. 
According to Robert Ochieng', a financial advisor at Abojani Investments, investors like Beatrice have lost their money because the fund manager they selected invested heavily in a risky investment asset class. "Amana took too much risk," says Ochieng'. 

How to ensure that the fund manager will not cost you your whole investment.
1.    Where do they invest? 
Michael David, a financial and investment coach at MoneySense, says that before you select a fund, find out where it invests. The safety or riskiness of a money market fund is to a large extent determined by its asset allocation. "Every fund has a legal contract how it intends to invest. A fund's mandate can give you an indication of how risky the fund's investments are," he says.
In the case of Amana, investing in a commercial paper which is a short-term (less than 1 year) debt instrument is risky and would leave you in the red. 

2.    The returns are too high
A money market fund that promises outrageously high returns is a very risky bet. "Most funds invest in the same asset classes. The yields should fall within a certain range. A fund that outperforms the others by large margins means its manager is taking on more risks," says David. He points out that a fund that invests in commercial papers is the riskiest, followed by bank deposits. "The safest money market fund is that with the highest percentage of its fund invested in treasury bills," he says. Treasury bills have a shorter duration and zero credit risk. 

3.    How does it calculate interest?
David says that you should be aware of how a money market fund compounds interest. This is because certain money market funds don't compound interest monthly. "If you don't want to roll over the interest earned you can make arrangements to have it credited to your bank account at the end of every month." 
This is echoed by George Mangeni, the co-director at Market Cap Trainers. He says that a fund should be transparent enough to disclose where it invests, to both investors and potential investors. This disclosure should include sustained returns for at least the last five years, its license, the license of its fund manager, custodian, trustee, and auditor. 

4.     History with customer service
Look at the fund manager's history with customer service and years of operation. You can tell how stable a fund is by checking the kind of brand that backs it. Check the custodian of the fund and the trustee. The size of the fund matters too. This can be checked on periodic CMA statistical bulletins on the CMA website.

Some key terms to know:
1.Fund manager: manages the pool of capital (funds) on behalf of the investors (unit holders). Go for a licensed fund manager with a good track record and sustainable returns.
2.Custodian: Holds the assets under management (AUM) on behalf of the investors. This is normally a bank or a micro-finance institution approved by the Capital Markets Authority. 
3.Trustee: Governs the fund and holds everyone involved accountable on behalf of the investors. They must be CMA-approved. 
4.Auditor: Reviews the financial statements of the money market fund and gives an opinion as to whether they are true and fair or not. Investors rely on audited financial statements to assess the performance of their investment.


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