Should You Take a Loan to Invest in a Money Market Fund?
Read Time:3 Minute, 6 Second
When Peter Mburu, a 30-year-old businessman from Ruai, heard from a friend that a money market fund could offer returns of up to 10% a year, he saw an opportunity.
He borrowed KSh 100,000 through a mobile lending app at a 15% annual interest rate, deposited the money in a fund managed by a local asset manager, and waited.
Two years later, he had earned KSh 20,000 in gross interest. But his loan cost him KSh 36,800.
Peter’s experience illustrates a growing curiosity among Kenyans: can borrowing to invest in a money market fund really pay off?
The Logic Behind the Move
On the surface, the idea appears to make sense. Money market funds, which pool investor cash and channel it into short-term government securities and corporate paper, are considered low risk and provide predictable returns.
If the fund yields 10% and the cost of borrowing is 8%, the math suggests a profit of 2% annually before taxes and fees.
But Kenya’s lending environment tells a different story. Personal loan rates range widely, from 10% for secured bank loans to over 20% for mobile loans.
Meanwhile, money market fund yields typically fall between 8% and 12%, depending on Central Bank of Kenya (CBK) policy and the performance of short-term instruments like Treasury bills.
Read: Should You Invest Ksh 1 Million in a Money Market Fund or a SACCO?
Hidden Risks Behind the Numbers
Many investors overlook key risks. Taxes, fees, and changing rates can quickly erode any expected gain.
Money market returns are subject to a 15% withholding tax. Fund management fees typically hover around 1–2% annually. Loan processing charges or early repayment penalties, especially common with mobile lending platforms, further shrink margins.
Take this example:
-
Loan: KSh 100,000 at 15% interest for two years
-
Total interest: ~KSh 36,800
-
Money market fund return: ~KSh 20,000 gross over two years
-
Net return after tax and fees: ~KSh 15,000
-
Final balance: Loss of ~KSh 21,800
Even with a 10% loan, interest payments over two years would total roughly KSh 21,000, nearly canceling out potential gains.
Beyond the numbers lies the pressure of owing money. Loan repayments remain fixed regardless of how the investment performs. If the fund underperforms or cash is needed urgently, the investor is still obligated to repay the loan, potentially creating financial strain.
Are There Better Alternatives?
Instead of borrowing to invest, other approaches may offer better financial outcomes:
-
Use savings instead of loans: Eliminates interest and avoids financial strain.
-
Invest in SACCOs: Returns often range from 10–14% with dividends and rebates.
-
Consider Treasury bonds: Longer-term, lower-risk, and can offer better yields than money market funds.
-
Repay high-interest debt: Offers a guaranteed return equivalent to the interest rate being saved.
Read: SACCOs vs Bank Loans: Which is Better for Business Financing?
When It Might Work
There are rare cases where borrowing to invest in a money market fund could work, for instance, if you access a secured loan with an interest rate under 8% and invest in a high-yield fund offering 12% or more.
But this assumes stable yields, no liquidity needs, and careful attention to fees and tax.
It’s a thin margin and a risky bet. One rate adjustment from CBK or a fund underperformance, and the outcome could turn negative.
The Bottom Line
For most Kenyans, the numbers don’t support taking a loan to invest in a money market fund. The risks, from loan costs to yield volatility, often outweigh the potential gains.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.
Happy
0 %
Sad
0 %
Excited
0 %
Sleepy
0 %
Angry
0 %
Surprise
0 %
0
0
Average Rating