What a money market fund rate actually means

Open three Kenyan money market fund pages on the same morning and you get three rates. They look like they are measuring the same thing. They are not, and the gap between the advertised number and the money that reaches you is wider than the gap between the funds.

Here is what sits behind the figure.

A rate can be any of three things

Daily annualised yield. What the fund earned yesterday, multiplied up as though every day of the year looked like yesterday. This is the number most Kenyan managers publish, and it changes daily. It is a snapshot, not a promise, and it is not what a full year would pay.

Effective annual yield. What a shilling left alone for a year actually becomes, with each day's interest earning interest of its own. Higher than the simple annualised figure, because compounding is included.

Declared annual return. What a finished year paid. Backward-looking and real, which also means it describes conditions that have already gone.

A fund quoting 14% daily annualised and a sacco declaring 10% for last year are not two points on one scale. One is a guess about a year from a single day; the other is a completed year's history.

And then tax

Interest from a collective investment scheme is subject to withholding tax at 15%. It is deducted before the money reaches you, so the published rate is a rate you never see in full.

This is where the arithmetic gets fussy in a way that matters. The tax comes off each day's interest as it is credited, and what is left is what compounds. Tax first, then compound — not the other way round.

Take a fund quoting 14%, daily annualised, before tax:

• Gross, compounded over a year: 15.02%
• Tax the whole year's gain at 15%: 12.77%
• Tax each day's interest, then compound: 12.63%

The middle figure is wrong, and it is wrong in the flattering direction. At 14% it overstates by about 14 basis points. At 18% it overstates by 23. Not enough to change which fund you pick — enough to make a comparison table disagree with your statement, and then you spend an afternoon finding out why.

Doing the three funds

Those advertised rates, all quoted the same way, all taxed at 15%:

The order did not change. It often does not. But the level did — by well over a percentage point — and the level is what you compare against a Treasury bill or a sacco.

The question that is not on the page

Nearly every Kenyan fund publishes net of its own management fee, so the rate already has the manager's cut taken out. What it does not tell you is the part that costs real money when you need the cash:

• How long does a withdrawal take? Two working days is common. Some are longer. A fund paying 0.3% more that takes a week to pay out is not the better fund if the money is for school fees.
• Is there a minimum, and a minimum top-up?
• Is there an exit fee inside a notice period?
• What is the rate's convention? If the page does not say whether the figure is daily annualised or effective, and whether it is before or after tax, you are not being given enough to compare it with anything.

What this means for the comparison on Ipahco

Every rate on Where to put money carries three things the advertised figure usually leaves out: the day it was true, who published it, and which convention it was quoted in. It is then brought to one basis — what a year keeps after tax — so a fund, a bill, a bond and a sacco can sit in one column without the ranking being decided by whose house style you happened to copy.

It is also why some rows are older than others, and why the page says so on every row rather than only the stale ones.