By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

24 May 2015

Many readers have asked me to tell them which “the best Unit Trust” to invest their money in. Unfortunately, I cannot recommend any particular company; but I can show how to make the choice. That is, show you how to catch the proverbial fish rather than giving it to you!

Start by looking at the list of Unit trusts that appears in the newspapers every day (Tuesday to Saturday). Tick out the companies that you know and focus on these only. Never give you money to some one that you don’t know! Check the interest rates for a few weeks or up to one month then call the one with the best performance.

You don’t have to wait for one month; you can easily look up the historical performance in old newspapers! But before you sign on the dotted line, establish from the company whether what they publish are gross or net rates. The Capital Markets Authority must crack the whip and force fund managers to use a standardised method.

Now, the table in the newspaper shows “daily yield” and “effective annual rate”. The “daily yield” is the earning rate for the previous day expressed as an annual percentage.

Suppose you have Sh100,000 in a certain fund that publishes a net daily rate of 9 per cent. This is an annualised rate so it is equivalent to 9/364 = 0.0247 percent for one day. Therefore, your money earned Sh24.70 on that day. Yes; 364. Not 365! Financial investment calculations use a 364-day year because that number is divisible by seven – it gives a year of exactly 52 weeks.

It looks small, but if the rate is maintained for a month you will have 24.70 x 30 = Sh741. How much do you think this money would earn in a bank savings account? I think Sh150 at best!

The effective annual yield is the average of all the daily yields for the past one year. But it is not a simple arithmetic mean: it is a geometric mean. In short, it tells you what you would have earned if you had kept your money in the fund for the last 364 days.

So if, a year ago, you had put Sh100,000 in a Money Market Fund whose effective annual yield is 11%, then you would be having Sh110,000 today.

A few readers have gotten mixed up about Equity Fund Unit Trusts and Money Market Fund Unit Trusts. So it is only fair that I distinguish the two.

Equity Funds invest the money in the Stock Market. They are intended for people who want to tie up the money for a long time – at least five years, but, preferably over 10 years!

For that reason, I do NOT recommend that you put you ESSENTIAL SAVINGS in an Equity Fund Unit Trust. So, when you call the fund manager insist on the Money Market Fund – do not agree to be swayed into anything else; no matter what!