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Fixed income funds outperform short-term unit trusts
MMFs remain the most popular class of unit trusts based on the ease of entry and exit for individual investors, with most of the funds allowing immediate withdrawals.
Fixed income funds beat returns from money market funds (MMFs) over the 12 months to March 2025, thanks to higher returns from the sale and revaluation of long-dated bonds in a falling interest rate environment.
According to data from the Fund Managers Association (FMA), which shows the yields on select fixed income funds and MMFs, the average return for unit trusts primarily investing in Treasury bonds stood at 16.94 percent, compared with 12.96 percent for MMFs in the review period.
The CIC Fixed Income Fund delivered an annualised return of 34 percent between April 2024 and March 2025, the highest return among fixed income funds, compared to the highest yielding MMF – the CIC Wealth Fund at 15.09 percent.
FMA chief executive officer Fred Mburu noted that fixed income funds were able to beat the returns of popular MMFs by selling bonds whose prices soared as interest rates on new auctions fell.
Bond prices usually have an inverse relationship with yields, with prices rising when returns fall. This has allowed fund managers to revalue their bond holdings higher while eking out improved income from the sales, resulting in the improved performance.
“Fixed income funds would be a bit different from money market funds (MMFs), which are longer-dated instruments. Interest rates on bonds have come down between April 2024 and March 2025, but prices have gone up resulting in higher yields for the bond funds on sales and revaluations,” Mr Mburu said.
MMF investors are, however, not expected to shift to fixed income funds given their low-risk appetites.
Fixed income funds feature duration risks, exposing investors to lower yields when interest rates rise.
MMFs, on the other hand, are less affected by changes in interest rates as they invest primarily in short-term/shorter maturing instruments such as Treasury bills and fixed deposits.
MMFs have still taken a hit from falling interest rates as maturing funds are reinvested in lower-yielding Treasury bills and commercial bank fixed deposits.
In a rising interest rate environment, MMFs tend to outperform fixed income funds as fund managers can quickly reinvest in higher yielding papers. In the falling interest rate environment, fixed income funds are expected to continue outpacing returns from MMFs in the second half of 2025.
“We will see yields on MMFs come down to sub-10 percent. Yields on fixed income funds will also come down but fund managers will be able to squeeze out a higher return due to the long tenure of investment,” Mr Mburu said.
MMFs remain the most popular class of unit trusts based on the ease of entry and exit for individual investors, with most of the funds allowing immediate withdrawals.
Other types of unit trusts include equity funds, which invest primarily in listed stocks; balanced funds, which invest in a mix of equities and fixed income instruments; and special funds, which have a bias towards alternative asset classes such as offshore.
Unit trusts can also have a currency mix, the most popular being dollar funds outside of the shilling-denominated collections.
MMFs had an asset base of Sh246.8 billion as at December 2024, accounting for 63 percent of all unit trusts, while fixed income funds ranked second with an asset base of Sh66.7 billion, according to data from the Capital Markets Authority (CMA).
