A Beginner’s Guide to Investing in Mutual Funds | Investment 101

Investing in mutual funds is a great way to diversify and grow your money over time. They not only provide diversification but also professional management and potentially higher returns. If you are new to investing, the whole process can feel a bit daunting. Where do you start? What are the best funds to invest in?

In this beginner’s guide, we will walk you through everything you need to know about investing in mutual funds, from understanding the basics to choosing the right fund for your financial goals. So, buckle up and get ready to take control of your financial future with mutual fund investments.

Mutual funds

What are Mutual Funds?

A mutual fund is a financial vehicle that pools resources together and invests in securities like bonds, stocks, and money market instruments. Mutual fund combined holdings are known as the portfolio. Investors buy shares in mutual funds, which represent the investors part ownership in the fund and the income they generate.

These funds are managed by fund managers who allocate the fund’s resources and attempt to produce capital gains for the investors. The mutual fund manager structures and maintains the fund as per the prospectus, ensuring the investment objectives are achieved.

Mutual fund managers track the performance of their funds by aggregating the performance of the underlying investment. Through these funds investors have access to a professionally managed portfolio of securities. Each investor participates proportionally in the gains and losses of the fund.

Fund managers or investment advisers have the obligation to ensure they work in the best interest of the fund. Mutual funds are usually larger parts of an investment company.

What is “pooling of funds”?

Pooling of funds is the process of combining funds from various sources into a single pool of money. The money can then be used for different purposes, such as investments, loans, or other needs.

There are many benefits to pooling funds. For one, it allows individuals or businesses to access more money than they would otherwise have access to. Additionally, pooling of funds can help reduce risk by spreading it out among different sources. Finally, pooling funds can also help improve returns by allowing the money to be invested in a variety of different ways.

Types of Mutual funds that are available.

There are many different types of mutual funds that you can invest in, and they are categorized based on various characteristics. The main categories of mutual funds include stock funds, money market mutual funds, bond funds, and target date funds. We look at each type of fund.

Mutual Funds Based on Asset Class

Equity Funds

Equity funds invest mostly in stocks, and they are also referred to as stock funds.” Mutual funds are either small, mid-cap, or large cap. Fund managers pool money from various investors and invest in shares of companies. The returns of the funds depend on the performance of the shares in the market.

Equity funds generate good returns over time but tend to have a higher level of risk.

Debt Funds

A debt fund invests in fixed-income securities such as bonds, and Treasury bills. Debt funds have a fixed interest rate and a maturity date, which makes them a great option for those looking for passive income.

Money Market Funds

Fund managers invest your money in money market funds for a short term period of not more than 13 months. Such funds offer a minimal return but also have a lower risk rate.

Hybrid funds

Hybrid funds, also known as balanced funds, are an optimal mix of bonds and stocks. They bridge the gap between equity and debt funds. The ratio of equity and debt can be fixed or variable. For example, a fund manager can choose to invest 60% in stock and the rest in bonds.

Hybrid funds are ideal for investors looking to take a risk and earn a substantive return.

Mutual Funds Based on Investment Goals

Here are mutual funds based on investment goals.

Growth funds

Fund managers allocate a considerable amount of funds to shares and growth sectors. Growth funds are suitable for investors with idle money that they can risk.

Income funds

Income funds belong to the debt category and include a mix of bonds , certificates of deposits, and other securities. They are ideal for keeping portfolios in tandem with the rate of inflation. Fund managers ensure the portfolio’s creditworthiness is maintained while earning investors better returns.

Liquid Funds

Liquid funds also belong to the debt category, like income funds. They invest in debt instruments and money market funds with a tenure of up to 91 days.

Tax-saving funds

Tax-saving funds offer the benefit of wealth maximization and also allow you to save on taxes. Investing in funds that are predominantly equity-based generates non-taxed returns. They are ideal for investors with a constant income who are looking for a long term investment horizon.

Aggressive growth funds

Aggressive growth funds are designed to earn high returns. They are susceptible to volatility and are high risk funds.

Capital protection funds.

Capital protection funds protect your principal while earning smaller returns. Fund managers invest in bonds, CDs, and equities. They have minimal risk, but it’s advisable to invest for at least 3 years.

Fixed maturity funds

Fixed funds invest in bonds, securities, and money market funds. They have a fixed maturity period.

Mutual Funds Based on Structure

Mutual funds are also classified based on structure, as shown below.

Open-ended funds

Open ended mutual funds allow investors to trade at their convenience and exit when they want. There is also no limit on the number of units. This means the unit capital changes when there are exits and entrants.

Closed-ended funds

Close-ended funds have agreed on the number of units investors can purchase .Some funds also have new fund offers that have a deadline to buy units.

Interval funds

Interval funds have the characteristics of both closed-ended and open-ended funds. They are open for purchase at specific intervals and then closed. Interval funds are suitable for investors looking to save a lump sum for a short-term period of 3 to 12 months.

Specialized Mutual Funds

These are mutual funds based on certain industries.

Sector funds

Sector funds are mutual funds that invest in a particular sector of the economy, such as healthcare, energy, or technology. These funds can be a great way to diversify your portfolio and get exposure to a particular industry or sector. However, sector funds tend to be more volatile than other types of funds, but they can also offer the potential for higher returns.

Index funds

Index fund mutual funds seek to track the performance of a particular market index, such as the S&P 500. These funds are passive in nature, meaning they do not seek to outperform the market but rather seek to match the market’s performance. Index funds are a popular choice for investors who want to diversify their portfolios without having to actively manage their investments.

Index funds have lower fees than actively managed funds, and they are often considered to be a more efficient way to invest. For these reasons, index funds have grown in popularity in recent years.

Emerging market funds

Emerging markets mutual funds invest in stocks of companies located in developing countries. These funds offer a higher level of risk than traditional mutual funds, but they also have the potential for higher returns. Emerging markets are expected to contribute to global growth in the coming year, which makes emerging market funds ideal for long-term investment.

Benefits of investing in mutual funds

Mutual funds offer a number of benefits. Here are the main ones.

Professional management

Mutual funds are managed by experts who make investment decisions. A good fund manager will have a deep understanding of the market and the various types of mutual funds available. They will also be able to create a portfolio that is tailored to your individual needs and goals.


Diversification is a key principle of investing, and mutual funds are a great way to achieve it. By investing in a mutual fund, you can get exposure to a wide variety of asset classes, sectors, and geographies, which can help reduce risk and improve returns. Mutual funds give you the opportunity to put your eggs in different baskets.


Mutual funds are relatively affordable. You can get started with a mutual fund for as little as 10,000, which makes them a great option for beginner investors. They are also widely available, so you can easily find a mutual fund that meets your investment goals.


Mutual fund investors can redeem their shares at any time at the current net asset value.

Standard chartered investment plan

What are Collective Investment Schemes in Kenya?

A collective investment scheme is an investment vehicle that pools resources from different investors and invests in a range of assets. They invest in assets such as stocks, bonds, or equities. Collective assets managed by a fund manager are known as “portfolios.

The investment in a fund is divided into units, which represent a proportionate ownership of the fund’s overall assets. Unit prices fluctuate as the prices of the underlying assets rise and fall.

Different funds have different risk levels. Some have a high risk, while others have a low risk. When investing in collective investment schemes, always consider’

  • The risk you are willing to take
  • Financial situation
  • Investment goals and the knowledge of the fund

There are several CIS, including mutual funds, money, and unit trusts. One of the most common CISs in Kenya is the money market fund. MMF makes up 80% of the CIS under management.

FactorMoney Market funds/Fixed income fundEquity FundBalanced Fund
GoalLiquidity and stable returnsCapital AppreciationCapital appreciation and liquidity
Asset allocationInvest in bonds and treasury billsInvest in equitiesInvest in fixed income like treasury bills, bonds and equities.
Risk toleranceLow riskHigh riskModerate risk
Time horizonShort termLong term investmentMedium term investment

What are Unit Trusts in Kenya?

A unit trust is a type of investment fund that is made up of a pool of money from different investors. The money in the fund is then used to buy a variety of assets, such as stocks, bonds, and other securities. The fund is managed by a professional money manager, who makes decisions about where to invest the money.

Profit made from a unit trust goes straight to individual unit owners and is reinvested back into the trust. Unit trust funds have the structure of incorporated mutual funds. The main difference between a unit trust and a mutual fund is that the earlier is established through a trust deed. This means the investor is the beneficial owner of the trust.

It’s important to note that in some jurisdictions, unit trusts and mutual funds are the same. For example, in Kenya and Asia, unit trusts are the same as mutual funds. In other areas, unit trusts are also known as income trusts.

Risks of investing in Mutual funds

Mutual funds are often touted as a safe and easy way to invest, but there are a few risks to be aware of before investing in one. Here are the risks you should consider before making that investment decision:

There is no guarantee on returns.

There is no guarantee that you will get any return on your investment. Mutual fund prices can go up or down, and you may lose money if the value of the fund goes down. Before investing in mutual funds, you should consider your financial goals and risk tolerance. Speak with a financial professional to get guidance on which mutual funds may be suitable for you.

Market risk

Mutual funds may be prone to changing market conditions due to

  • Global, regional, or local economic development
  • Government policies or political conditions
  • Changes in the regulatory framework
  • Change in interest rates.
  • Natural disasters and wars

Security risk

This is the risk that a company will default on repayment of coupons, debentures.

Liquidity risk

Liquidity is the ease with which a security can be sold. The risk that it will not be easy to sell a security at a near-fair value depends on the volume traded in the market.

Inflation risk

Inflation risk is the loss in purchasing power of your investment due to an increase in consumer prices.

Managers risk

This is the risk that the manager does not have the expertise and experience to manage the fund.

Interest rate risk

There is a risk that interest rates will rise, leading to the prices of fixed-income securities falling. This will result in the value of the portfolio going down.

Prepayment risk

This is where the borrower pays the loan in advance, resulting in a change in tenor and yield.

Risks of money market funds

Money market funds (MMFs) are mutual funds that invest in short-term debt securities, such as Treasury bills, commercial paper, and certificates of deposit. MMFs are a type of low-risk investment, as the securities in which they invest are typically very stable and liquid. However, there are still some risks associated with investing in MMFs.

Credit risk

Credit risk measures the likelihood of the counterparty defaulting.

Liquidity risk

This risk can result from market volatility or a lack of liquidity in the underlying assets held by the fund.

Low returns

There is a chance that the returns may fall below the inflation rate. This results in negative real returns for the investor.

Difference between a stock and a mutual fund

Investing in stocks and mutual funds is an excellent way to diversify and earn an income. But what exactly is the difference between these two options?

Stocks are individual pieces of ownership in a company. When you buy stocks, you are essentially buying a part of the company. Mutual funds, on the other hand, involve pooling funds together with other investors and investing in different investments, including stocks, bonds, and other assets.

When you invest in a mutual fund, you pool money with other investors, spreading your risk out over a variety of different investments.

So which is the better option for you? It depends on your individual investment strategy and risk tolerance. If you are looking for a more hands-off approach, a mutual fund may be a better choice. But if you are willing to take on more, then invest in stocks.

Here is a summary of the main difference between stocks and mutual funds

StocksMutual Funds
What is ?Stocks are an investment in a company and you are eligible for to earn to share in profit and losses.Mutual funds is a portfolio of investments. Mutual funds include stocks, bonds and other assets
Best ifStocks are best if you want to pick the company to invest and grow your portfolio.If you are looking to diversify and invest in a large stocks then look for mutual funds. Mutual funds are also ideal for beginner investors as they are managed by fund managers.
FeesCommission when stocks are sold.Management fees, transaction fees and short term redemption fees may be charged.
RiskThe risk is high because you are investing in a single company.The risk is low since there is diversification.

What are Money Market Instruments in Kenya?

A money market instrument is a financial instrument that can be used to raise capital in the money market. Money market instruments are short-term, and they can be either debt instruments or equity instruments.

Debt instruments are mostly issued by governments or corporations, and they include Treasury bills, bonds, commercial paper, and certificates of deposit. On the other hand, equity instruments are issued by companies, and they include shares.

Money market instruments are used by a variety of market participants, including banks, corporations, and investors. They can be used for a variety of purposes, including financing business operations, investing in short-term assets, and managing risk.

Here is a breakdown of money market instrument in Kenya:

Commercial paper

This is a promissory note issued by large banks and corporations. Since commercial papers are purely a promise to pay , banks and corporations look at the credit worthiness of the issuer.

Commercial papers are short-term, unsecured loans issued at a discount. The difference between the price and the par value is the profit for investors. They are used to finance short-term cashflow needs, such as buying inventory.

Treasury bills

Treasury bills are issued by the government when in need of finances to cover their deficits and refinance treasury bills reaching maturity. They are sold at a discount, and the difference between the purchase price and the face value is the profit for the investor.

Certificate of Deposit (CD)

CDs are issued mostly by commercial banks, and they have a fixed maturity date and interest rate. CDs attract a penalty if you withdraw prior to the agreed period.

Corporate bonds

A corporate bond is a fixed-income instrument issued by a corporation to raise money. Investors earn pre-established variable or fixed interest for a given period. After the period expires, the investor receives their original investment.

They are liquid, hence offering investors an easy exit. Corporate bonds are backed by the ability of the company. This is backed by the revenues and profitability of the company. In comparison to other assets, they are less volatile. Here are examples of corporate bonds :

CompanyIssue DateTermCouponMaturity date
Centum investment Ltd 16th Dec 20203 years12%16th Dec 2023
Family Bank25th June 20215 Years13.7526th December 2026
East Africa Breweries29th October 20215 years12.25 payable semi annually29th Oct 2026
Kenya Mortgage refinance company4th March 20227 years12.50 payable semi annually23rd Feb 2029
Treasury Bonds

Treasury bonds are medium- to long-term debt instruments that offer the investor interest every six months during the life of the bond. There are a variety of bonds offered on a monthly basis. Most bonds offer a fixed interest rate.

7-Day Yield

The seven-day yield is the annualized return for a money market mutual fund. It’s the fund’s total income net of expenses divided by the number of outstanding shares. You can calculate the 7-day yield by computing the fund’s average seven-day distribution plus any appreciation minus the fees incurred in the seven days.

Take the price of the fund today less the price seven days ago and multiply that by an annualizing factor. The 7-day yield helps you compare the performance of different money market funds.

Types of Money Market Funds

Money market funds are classified depending on the class of investment assets, maturity period and other attributes.

Prime Money Fund

Prime money market funds invests in floating-rate and commercial papers like those issued by corporations, government agencies, and government sponsored enterprises.

Treasury fund

Invest in Treasury-issued debt securities such as Treasury bills, Treasury bonds, and Treasury notes.

Tax exempt money fund

As the name suggests, this fund is exempt from tax.

Net Asset value (NAV) standard

This kind of money market fund aims to maintain a net asset value of $1, or its equivalent. Any excess earnings that it generates are distributed to the investor in the form of dividend payments. One of the main reasons this fund is popular is because it requires the fund manager to distribute any excess cash flow regularly.

If the fund falls below $1 or its equivalent, it is referred to as breaking the buck. This may occur due to a temporary fluctuation in prices.

How can I join money market fund in Kenya?

To join a money market fund, you will need to choose a money market fund of your choice.

Then you will need to provide your identification document, KRA pin, passport photo, bank details, and the completed money market application.

After providing the above documents, you need to deposit the money into your account. You can deposit through MPESA or from your bank account.

List of all Money Market Funds in Kenya

Which Is Better: Money Market Fund or Savings Account?

Two of the most popular saving options are money market funds and savings accounts. Both money market funds and savings accounts have their pros and cons. Money market funds tend to offer higher interest rates than savings accounts. Savings accounts are a safer option, but the interest rates are usually lower.

The best option for you will depend on your individual circumstances. If you are looking to grow your money faster, a money market fund may be a better choice.

The Best Money Market Funds in Kenya by Yield.

Here is a ranking of the best money market funds by yield in Kenya.

Money market fundInterest rate (14th AprilInflation rate( April 2023)
Cytonn Money Market fund11.037.9%
Madison money market fund10.79%7.9%
Etica Money Market Fund10.767.9%
Dry Associates Money Market Fund10.507.9%
Apollo Money Market Fund10.50%7.9%
Jubilee Money Market Fund10.367.9%

Compound interest investments Kenya

Compound interest is one of the most powerful tools available to investors. By reinvesting your earnings and allowing them to grow, you can create a snowball effect that can grow your wealth exponentially over time.

Compound interest investments are a great way to build long-term wealth, but they do require some patience. Here are some of the investment options that offer compound interest in Kenya:

  • Money market funds
  • Fixed deposit accounts

Top 5 Money Market Funds in Kenya by Assets Under Management (AUM) 2022/2023

Here are the top 5 money market funds by asset under management (AUM).

  • CIC money market fund
  • NCBA money market fund
  • Britam money market fund
  • Sanlam money market fund

Now that you know the basics of mutual funds, you are ready to start investing. Remember to look for a fund that meets your investment goals and to diversify your portfolio. With a little research, you can find a mutual fund that’s right for you.

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