Why Investing In Money Market Funds Is No Longer A Good Idea: John Mbadi

Treasury Cabinet Secretary (CS) John Mbadi has validated what many investors feared: that returns from Money Market Funds (MMFs) are on the decline and aren’t likely to recover soon.

While speaking to digital media publishers on Friday, May 16, during a Youth Parliament Session on the Budget and 2025 Finance Bill, Mbadi explained that the dip in interest rates is tied to the government's move to borrow from the public at lower rates.

In particular, the currently low interest rates on Treasury Bills, which form a major part of Money Market Fund portfolios, have led to reduced returns for individual MMF investors.

"The interest rates have been going down, especially the rate at which the government has been borrowing. When I came in, the government was borrowing at 16%. Right now, it is going below 9% for 91-day Treasury Bills," he admitted.

"So the money market is not as lucrative as it used to be. I know some of you in the money market are wondering, 'What has Mbadi done?' It is better for the economy as a whole, but may not be good for an individual investing in the money market."

Treasury Bills (T-Bills) are short-term government securities issued by a country's treasury or central bank to raise funds. In Kenya, for example, T-Bills are issued by the Central Bank on behalf of the government.

They are considered one of the safest investment options because they are backed by the government, meaning the risk of default is extremely low. T-Bills are typically offered in three tenures: 91-day, 182-day, and 364-day maturities, which means they mature in about 3, 6, or 12 months, respectively.

T-Bills, however, do not pay interest in the conventional sense. Instead, they are sold at a discount to their face value, and the investor earns a profit when the full amount is paid at maturity.

For instance, you might buy a T-Bill with a face value of Ksh100,000 for Ksh95,000. When the bill matures, the government pays you the full Ksh100,000, so you earn Ksh5,000 as your return. This return is influenced by the prevailing interest rates, demand for government debt, and economic factors like inflation.

Because of their reliability, T-Bills are a key component in many low-risk investment products like MMFs. However, when interest rates fall, as they have recently, so do the returns on T-Bills, which directly affects how much investors can earn from MMFs, making MMFs a less attractive form of investment.

Despite lower yields in such conditions, T-Bills remain popular for their security and liquidity, making them a go-to option for conservative investors and institutions looking to preserve capital while earning a modest return.

An MMF is a unit trust fund managed by a professional fund manager, providing investors with a safe place to keep their cash while earning a return. MMFs serve as an alternative to traditional savings accounts such as those in banks, offering competitive interest rates while maintaining a high level of security. 

Read more: How Money Market Funds Work: A Comprehensive Guide