Saving money in Kenya has never been easier. If you start exploring ways to do it, you will quickly notice that you are spoilt for choice. Many schemes promise significant returns and protection from inflation, some come with an insurance guarantee. And all boost of how low risk they are by how safely they can protect your initial capital.
But two money-saving instruments have grown in popularity in Kenya: SACCOs and Money Market Funds (MMFs). They both promise one thing: to make your money work for you.
Kamau is a 35-year-old civil servant. He recently had a big family emergency that depleted his emergency saving, and he was looking to start building one again. On top of that, he also has to start saving for kindergarten fees for his child, who will start school soon. After researching and crossing different saving schemes off his list, he remained with SACCOs and MMFs. How does he decide between the two?
To accomplish your saving goals, you need to choose a vehicle that aligns with that goal. And if you are like Kamau and torn between putting your saving in a SACCO or MMF, you should first understand how they compare.
This article will explore both advantages and disadvantages of SACCOs and MMFs, what they are best used for and what you should consider when you are at crossroads on what saving path to take. Read on.
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Savings and Credit Co-Operative Society better known as SACCOs are member-based institutions that offer various financial services, from saving to loans to members. They are a type of self-help organisation that pools resources from a group of people with shared goals, ideals, and values.
The pooled resources are invested and utilised in a manner that can generate more income for the collective. The generated income is then divided among members according to their contributions and shares. The income is paid out as interest on savings or dividends on shares.
SACCOs are member-driven co-operatives. They are controlled, owned, and managed by their members. Often, members have a similar link, such as sharing an employer, belonging to the same religion or social fraternity, or living in the same town. However, membership is open to other groups of people irrespective of their backgrounds.
The first SACCO established in Kenya was a diary cooperative that dates back to 1908. The industry has evolved since then, and there are 175 registered deposit-taking SACCOs in Kenya. They are licensed, supervised, and regulated by THE Sacco Societies Regulatory Authority.
Read Also: Saccos in Kenya: To Join or Not?
SACCOs have become alternatives for traditional banks in Kenya as more and more people take them up. They are heavily regulated, and funds are managed by professionals who work round the clock to protect members' money. But are they the best place for you to be keeping your money?
To answer that, you need to understand the advantages and disadvantages of using this investment vehicle.
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Read Also: Factors to Consider Before Joining a SACCO
Given their high returns and capital appreciations, SACCOs are best suited for people investing in long-term goals. They can help you keep track of your savings goals since you must contribute a minimum amount monthly. Additionally, you can reinvest the interests and dividends you earn even to earn more.
Some long-term financial goals you can chase using SACCOs include: Retirement savings, saving for your child’s college tuition, and saving to buy a house.
Money Market Funds are unit trust funds that pool investors' money and invest it in low-risk liquid instruments. MMFs are managed by licensed professional fund managers who invest in different instruments on behalf of investors.
This investment vehicle is relatively safe and heavily regulated by the Capital Markets Authority (CMA). They are required to stay transparent, act in clients' best interest, and have an auditor who reviews their performance and reports to the regulatory body.
MMFs aim to provide investors with returns above inflation rates, lower their clients' risk exposure, and allow for easy liquidity. For this reason, they invest in various liquid vehicles like:
MMFs have gained popularity in Kenya thanks to their low entry points, with some funds allowing for minimum investments of Ksh1,000. Their diversified portfolio allows investors with insufficient capital to reap the benefits of investments that could be out of their reach.
Their commitment to investing in low-risk instruments has made MMFs the most accepted unit trust fund in Kenya. But just like every investment, it has its equal shares of merits and demerits. Understanding them will help you make a more informed decision.
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Given their high liquidity and accessibility, MMFs are best for people saving for short-term goals or who need to pack their money where they can easily withdraw. If you are saving for a Christmas vacation for your family, for instance, you can save in an MMF account and withdraw it when you are ready to pack your bags.
Other short-term goals you can save for using MMFs include building an emergency fund, weddings, home repairs, and maintenance, following year school fees for your children, etc.
Time Horizon: When choosing between SACCOs and MMF, your investment horizon can play a significant role. An investor with short-term goals will want an investment that gets him access to his money when he needs it.
If you plan to renovate your home within two months, your money will do better in an MMF account than in a SACCO. And if you are planning to buy land in the next five years, saving in a SACCO can be more attractive.
Reason for Saving: Are you saving for an emergency, or are you saving to increase your creditworthiness to qualify for loans? MMFs liquidity makes it a suitable place to park your rainy day funds, while SACCOs can help you qualify for higher loans.
Risk Tolerance: How much risk are you willing to take to meet your savings goal? Both SACCOs and MMFs are heavily regulated, and they rarely bust. Nonetheless, before you settle on any specific one, perform your independent research. Look at the type of investments they have and assess their risk exposure. A SACCO that invests in high-risk instruments can expose your savings to high risks.
Investment Capital: How much are you willing to commit at the beginning? The minimum investment amount to invest in MMF can be as low as Ksh1,000, and you don't have to make monthly payments. Depending on the SACCO you are joining, you will be required to pay joining fees, buy a specific number of shares, and make a minimum monthly contribution.
Your Expected ROI: How much are you looking to make in profits? MMFs only pay you interest, while SACCOs can earn you interest on your savings plus dividends on the shares you hold.
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Deciding between SACCOS and MMFs or making any other investment decision can be an overwhelming experience, especially if you are just a beginner. Both of these investments have their fair share of benefits and drawbacks. The best way to know which to choose is to go through your investment roadmap and evaluate everything.
Create a "pro and con" list and go through investment to see what will work best for you, depending on your goals, risk tolerance, and expected returns. Also, you should keep in mind that MMFS and SACCOS aren't the only saving instruments available, explore other options as well and factor them into your decision-making.
Settling on an investment strategy that works well for you will keep you more financially stable. And if the exercise proves too daunting, consider talking to a financial expert to guide you instead of making half-baked decisions.