Imagine you are new to investing. You’ve researched and narrowed your options to two popular choices – money market funds and exchange-traded funds. But now comes the crucial question: Which one should you choose?
Different investment avenues offer unique opportunities and advantages, making it essential for investors to evaluate their options carefully. In this blog post, we’ll conduct an in-depth analysis of Money Market Funds and Exchange-Traded Funds, exploring their similarities, differences, factors to consider when choosing between them, and the associated costs and fees. By understanding these aspects, investors can make more informed decisions and maximize their investment potential.
What are Money Market Funds?
A money market fund is a type of investment that pools money from many investors and invests it in short-term, low-risk securities such as treasury bills, commercial paper, certificates of deposit, etc.
The main advantages of money market funds are:
- They are safe. They invest in low-risk securities, and you can earn a steady interest income, usually higher than a bank savings account.
- Liquidity. You can withdraw your money at any time without penalty.
However, money market funds have disadvantages, such as low returns, inflation risk, and taxation. The returns from money market funds are usually lower than those of other investments, such as stocks or bonds, because they take less risk. Also, the interest income from money market funds may not keep up with inflation, meaning your purchasing power may decrease over time.
What are Exchange-traded Funds?
An exchange-traded fund (ETF) is a type of investment that tracks the performance of a basket of securities, such as stocks, bonds, commodities, etc.
The main advantages of ETFs are:
- Diversification. You can invest in different sectors, markets, or themes with one ETF, which reduces your risk and increases your potential returns.
- Cost-effectiveness. You can also buy or sell ETFs on the stock exchange like shares, which means you pay lower fees and commissions than mutual funds or unit trusts.
- Flexibility. You can choose from different types of ETFs depending on your risk appetite, investment horizon, and goals.
However, ETFs have disadvantages, such as market risk, tracking error, and currency risk. The returns from ETFs depend on the performance of the underlying securities, which may fluctuate due to market conditions, economic factors, or political events.
Additionally, the ETF may not perfectly replicate the performance of the index or basket it tracks due to fees, expenses, or other factors. Moreover, the ETF may be exposed to currency risk if it invests in foreign securities denominated in a different currency than the Kenyan shilling.
What are the Similarities Between MMFs and ETFs?
What are the Differences Between MMFs and ETFs?
Factors to Consider When Choosing Between Money Market Funds and Exchange-traded Funds.
When choosing between investing in a money market fund and an ETF in Kenya, you should consider several factors, such as:
In conclusion, there is no one-size-fits-all choice between money market funds and exchange-traded funds (ETFs). Both investment options have their own merits and considerations. Money market funds provide stability and low-risk returns, making them suitable for conservative investors seeking capital preservation.
On the other hand, ETFs offer diversification and potentially higher returns, making them attractive to more aggressive investors willing to take on some level of risk. When choosing between the two, it is vital to consider factors such as investment goals, risk tolerance, liquidity needs, and time horizon. Ultimately, investors in Kenya should carefully evaluate their financial objectives and seek professional advice before making investment decisions. By doing so, they can confidently navigate the financial markets and potentially achieve their investment goals.
How to Start Investing with ndovu.
At ndovu, we offer an easy and affordable way to diversify your portfolio through a curated selection of Exchange-traded funds (ETFs) on the platform. These ETFs are carefully chosen based on liquidity, management fees, and prospects. They offer investors instant access to a diversified portfolio for a much lower cost than purchasing the individual investments yourself.
Why invest in ETFs through ndovu and not directly through the NSE?
At ndovu, we offer a more affordable way to invest in ETFs than other avenues, making it accessible to a wider range of investors. Let’s look at how ndovu compares against investing on your own through the NSE or using a financial advisor.
Let’s look at a further breakdown of the costs of investing in ndovu.
1. Investing Fees
- Deposit costs- These service providers charge third-party payment fees:
MPesa – Standard MPesa transfer fees will apply.
Credit/Debit card – 2.9% fee charged by Flutterwave.
Bank transfer – Pesalink/RTGS fee will apply.
- ndovu subscription fees – These vary depending on the type of plan chosen (Basic or Black). This subscription fee covers the advice you receive, the transactions, trades, and all other account-related administration activities.
- Fund fees – The individual Unit Trusts/ETFs in your portfolio levy an annual management charge (AMC). This fee typically ranges from 0.2%-2% per annum, depending on the Unit Trust/ETF type.
2. Withdrawal Fees.
ndovu charges a withdrawal fee of $25 on USD investments and Kshs. 50 on KES investments.
US: There is a Withholding Tax on dividend income and a Capital Gains Tax on profits.
Kenya: Investment Income earned in Kenya may be subject to withholding tax as per the provisions of the Income Tax Act.
Whether you are an aggressive or conservative investor, the different funds offered on the platform can cater to your needs. With as little as $50, you can begin your investment journey and diversify your portfolio.
All ETF products are subject to risk, including country/regional, liquidity, and currency risks. Market prices of securities within the ETF may rise and fall, sometimes rapidly and unpredictably. It’s important to note that the right to redeem may be suspended and that past performance does not indicate future results.
The information provided on this platform, as well as the products and services offered, are intended solely for persons in regions and jurisdictions where such distribution and utilization are in accordance with local laws and regulations.
ndovu does not promote its services in regions where it lacks the necessary licenses; It is exclusively available to persons residing in countries where it holds a valid license or has licensed partners. ndovu does not extend its services to citizens of the United States, Canada, Japan, and other restricted territories.