By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

17 May 2015 

Did you know that the ordinary bank savings account pays interest only on the smallest balance during a month? Suppose it had Sh5,000 on 1st May and you deposited Sh5,000,000 which you withdraw on the 30th June. The interest for the two months would be calculated on Sh5,000; not Sh5,005,000! The reason is that Sh5,000 is the least balance in each month.

This is one other reason why you shouldn’t keep money in savings accounts; but where will you take it? I think the better place would be a Money Market Unit Trust.

Now let me clarify: there are essentially two types of Unit Trusts: Money Market Funds and Equity Market Funds. There are other types, but they are just variations and combinations of these two.

A Unit Trust is a collective scheme where many people pool their money together for it to be invested in Treasury Bills and Bonds, Commercial Papers, Banks Overnight Lending etc. This is done by experts so that people like you and I who don’t know what all those things are can rest easy and just enjoy good returns.

Most Unit Trusts in Kenya are operated by the leading insurance companies, so you can be sure that your money is in safe hands. But, do not confuse Unit Trusts with insurance policies!

The interest rates are very good: over the last two years, some Unit Trusts have consistently paid better rates than the 90-day Treasury Bill. Furthermore, the earnings are calculated every day (Monday to Friday) and the daily rates are published in the Newspapers (Tuesday to Saturday). Check out the top-right-hand corner of the page that carries Foreign Exchange data in the Daily Nation.

Most Unit Trusts will accept a minimum of Sh10,000 to open an account, but after that, you can withdraw as much as you want and the balance will continue to earn interest. One of my accounts has just Sh955 and last month it earned Sh5.50!

By the way, that works to about 8.2 per cent per annum before tax. I found the rate too low so I moved most of the money to another Unit Trust leaving only Sh800.

Another advantage is that, to open the account, you simply call the company and they will dispatch a sales executive with all the paperwork to you – wherever you are! Secondly, if you need to pull out some money, you simply send them an email and the money will be in your bank account in 48 hours. At 9:30am on May 8 2015, I sent a withdrawal request to my Unit Trusts (needed for school fees) and the money was in my bank account at 3:15pm – only six hours later.

Thirdly, the interest is compounded on a monthly basis. That is, you earn interest on interest every month. Most savings accounts in banks do it after three months; and fixed deposits operate on simple interest.

With so many advantages, why isn’t everyone keeping their money in Unit Trusts? I think it is because the public simply don’t know about them.