Home Money Personal Finance What is a Mutual Fund and How to Invest in them?

What is a Mutual Fund and How to Invest in them?

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A mutual fund is a  professionally-managed investment company that issues redeemable shares to investors. The purpose of mutual funds is to invest in stocks, bonds, money market instruments and other assets. Professional money managers structure, maintain and allocate the funds invested to match the investment objectives stated in the prospectus, in an attempt to produce capital gains and/or income.

Kinds of Mutual Funds

Mutual funds are divided into several broad kinds of categories based on the kind of securities they hold. They range from fixed-income funds, index funds, balanced, money market funds, sector funds, equity funds, alternative funds and many more.

The largest of these, globally, is the fixed income, the index, equity and the balanced mutual fund.

Fixed Income Mutal Fund

The fixed income mutual fund focuses on investments that pay a fixed rate of return i.e. government bonds, corporate bonds and other debt instruments. With a fixed income mutual fund, the managers’ aim is to generate a lot of interest income which can then be passed on to shareholders.

Index Mutual Fund

Through diversification, investors can gain exposure to the stock market by investing in an index mutual fund, which seeks to invest in a composite index. Most indexes are designed to provide the investors with a broad benchmark index that has the liquidity characteristics of the narrower index.

For example, should a mutual fund choose to match the NSE 20 Share Index,  it will be comprised largely by the financials, agriculture, manufacturing, telecommunication, construction and commercial sectors of the Kenyan stock market. The performance of the fund will, therefore, be tracked as the percentage change to its overall adjusted market cap.

Balanced Mutual Fund

The balanced mutual fund invests in both stocks and bonds – to reduce risk exposure to one asset class over another. The goal of this fund is asset appreciation at a lower risk level- though they still carry the same risk as other classification funds and are subject to fluctuations.


In Kenya, mutual funds into the following main categories:

  • Fixed Income Fund. Focuses on investing in securities that give a fixed income return on specified dates such as government and corporate bonds.
  • Balanced Fund. Invest in a diversified portfolio of stocks and bonds and some elements of money market instruments are added too.
  • Equity Fund. Focuses on purchasing stocks traded on the Nairobi Stock Exchange (NSE).

Benefits of Investing in Mutual Funds

There are various benefits to investing in mutual funds, chief of them being:

a. Easy to buy. Mutual funds very accessible and offered at brokerage firms, mutual fund companies, banks and insurance companies.

b. Broad market exposure. Mutual funds can invest in many different types of securities, making it possible to diversify.

c. Low minimum investment. Most mutual funds have low minimum initial investment amounts, where investors can either buy a minimum fixed amount in Kenyan shillings or a fixed number of shares.

This minimum amount varies from Kes 10,000 to Kes 100,000, depending on the mutual fund.

d. Professionally managed. Mutual funds have teams of professionals researching, analysing and placing trades. They enable investors to do more of the things they love in life rather than spending time and energy on investment matters.

d. Lower overall cost. Through mutual funds, it costs investors less in terms of transaction costs, annual fees paid to the brokerage firm, research, management of the portfolio, investment analysis and taxes.

Why Invest in Mutual Funds?

Mutual funds are regulated to a very high standard by the Capital Markets Authority (CMA) and are professionally managed. As such, they are subject to a great deal of scrutiny and compliance. Additionally, mutual funds typically invest only in companies that are listed on the NSE, which are also regulated by CMA. All investments made into a mutual fund remain in the investors’ name, and all transactions (money transfers) are done through official banking channels.

When investing in mutual funds, there is a low probability of falling prey to fraud(unlike schemes created by shady operators). However, this isn’t to say that you can’t lose money. All mutual funds make investments in market-linked assets and thus may fluctuate in value based on market conditions. Therefore, as a new investor concerned with the safety of your money, I would recommend starting with a liquid mutual fund – where you can access your money easily. As you get comfortable, explore higher risk – higher return equity concentrated mutual funds.

Yields on Mutual Funds

Mutual funds offer investors variable rates of return and returns are periodically distributed to investors. The rate of return on mutual funds in Kenya varies between 8-15% and charge about 2-3% in management fees annually.  This rate of return fluctuates on a daily basis, while management fees and inflation rates remain constant. Overall, the terms of investing in mutual funds vary from one mutual fund to another. And, some funds allow investors to redeem their shares at any time within a few days of notice.

How to Invest in Mutual Funds

Mutual funds pool money from thousands of investors and invest it across a wide range of asset types. These asset types cut across a wide array of industries, geographies and more. Thus, there is a lot to decide on before you invest.

In five simple steps, here is what you need to get done before buying:

  1. Decide how much you are willing to pay and what rate of return you would like. The cost and performance of the fund will guide to choose between an actively managed fund or a passive one.
  2. Know your budget. How much are you willing to place into the fund and top up periodically.
  3. Decide whether mutual funds are the right fit for you and your budget. Assess your risk tolerance and suitability as an investor.
  4. Understand and scrutinize the fees subject to you. If you can get a broker that offers no transaction fees (unlikely, but if) then it will help cut costs tremendously.
  5. Slowly build your holding and keep track of all your investments. Check and rebalance your mix of assets once a year.

Once you are all decided, approach the investment firm of your choice and share your goal with an investment advisor.

Bottom-line on Buying Mutual Funds

Mutual funds are very easy to invest in. They are also a smart investment choice for a great number of savers and investors. On buying mutual funds, be careful to select the best funds that align with your goals and risk tolerance.

Image credits: Top, by Rawpixel via Pexel

Meanwhile, You can click on the following links to read more about financial planning:


Disclosure: This information is provided to you as a resource for informational purposes only. 

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