18 Mar
Many investors are wondering, “Why money market fund (MMF) rates are dropping?” Rather than describing them as declining, a more precise way to explain the shift is that they are stabilising to reflect current economic trends.
What Are Money Market Funds?
Money market funds are low-risk investment options that invest in short-term financial instruments, such as:
- Call deposits (bank accounts that offer interest and quick access to funds)
- Fixed deposits (bank accounts with fixed interest for a set period)
- Commercial papers (short-term loans to companies)
- Short-term government securities like Treasury bills
The interest rates offered by money market funds depend on the returns of these short-term investments, which are influenced by economic conditions and government policies.
How Does Inflation Affect Interest Rates?
Interest rates in Kenya, especially for money market funds, are closely tied to inflation (the rate at which prices for goods and services increase). When inflation is high, investors demand compensation for reduction of their real returns leading to a rise in interest rates.
For instance:
- In 2022, Kenya’s inflation rate rose above 7.5%, exceeding the Central Bank of Kenya’s (CBK) target.
- By March 2023, inflation peaked at 9.2%.
- As of February 2025, inflation fell to 3.5%.
On the same note, the 91-day Treasury bill rate, which shows the return on short-term government securities, hit a high of. 16% in July 2024 and has since dropped to 8.9% as of March 2025 occassioned by the drop in inflation.
This explains why interest rates in the money market funds are trending downwards as every new and maturing investment is made at a lower rate than it was previously earning.
Will Money Market Fund Rates Stay Low?
The period of high money market returns was temporary, driven by a surge in inflation. As inflation rates stabilize so do money market fund returns. Money market funds are meant for capital preservation and to cushion investors against the rising cost of living hence these funds are adjusting to their normal range, typically between 8% and 11% in Kenya.
What Should Investors Do Now?
Despite the current rate adjustments, money market funds remain a smart choice for investors who need to accomplish crucial short-term goals (0–5 years) e.g. Education, Emergencies, Travel, Starting a business, and Building a Home. Here’s why:
- Low risk: Less volatile than stocks or real estate, making them a safer investment option.
- Liquidity: Easy access to funds whenever needed, ensuring financial flexibility.
- Better returns than savings accounts: typically offer higher yields while remaining stable and secure.
- Ability to generate compounded returns.
- Low initial amounts required and ease of regular top-ups.
- Transparency of the funds.
Looking for stable, low-risk investments, a money market fund is best suited for short-term financial growth.
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