Money Market Unit Trust
What is the Money Market Unit Trust, and why is it a viable investment vehicle?Just like a physical market, where traders may buy and sell commodities like chicken, goats, milk and boiled maize, in the money market, we trade money, and lend money. The lending has to be short term- for a period of one year or less. The lending has to be short term- for a period of one year or less.
This lending/borrowing is done through a variety of avenues, called instruments or securities. Examples of securities are Treasury Bills, Corporate Bonds, Commercial Paper, Fixed Deposits, certificates of deposit, bills of exchange, repurchase agreements (REPOs) ..e.t.c. The most common securities are treasury bills, commercial paper and bank deposits.
Treasury bills are short term government loans, where the government borrows money from the people to pay for urgent things… e.g. Salaries, MP’s sitting allowances – you know the drill.
Commercial paper is issued by large, respectable companies to take care of short term expenses, as they wait for their money from whoever has refused to pay them quickly.
Bank deposits are just that- deposits. In a bank. You agree to keep your money in the bank and not touch it for, say, three months, in return, they’ll give you back more than you put in. In reality they’ll just lend it to your landlord to build another block of flats, take the interest paid (not all of it, by the way) and give it back to you so you can continue paying rent.
So since you and I don’t have enough money in our small bank accounts to lend to the government, big companies and your bank, some smart fellows came up with a way of allowing us all to board the gravy train. We’ll call them Asset Managers. They introduced us to the unit trusts, which are pots that allow you to put in your 1K, they’ll take a million from your chama, and so on…. until they have billions.
They will lend these billions to the government, banks, corporates and their cousins. They will earn interest on these loans, and pay you back your principal and interest according to your contribution into the unit trust. Everybody’s happy. They’re not saints, they don’t do it for free. You’ll pay an average of 2% of your deposit to them annually as management fee.
Why is this a good investment?
1. This investment has lower risk compared to others in the market
2. You make more than you would if you just left your money in the bank
3. You can invest small amounts – minimum 1K
4. Since the unit trust is easily convertible into cash, you can take out your money pretty fast if you need it, at most 48 hours
5. It costs you less than that bottle of whisky you’re going to drink today.
There are a number of asset managers who offer unit trusts in Kenya.
Reach out to me on Moses.Githaiga@kiota-africa.com and we’ll look through them to identify which one suits you best.