This is part of a series of articles sponsored by NIC Bank. NIC is currently having a rights issue that will close on September 14^th.

A Mutual Fund or Unit Trust as they are also known is a fund that combines the investments of several individuals and institutions to collectively make financial investments. Investors share in the Unit Trust’s gains or losses. In Kenya unit trusts invest in shares, bonds and the money markets.

Mutual funds are professionally managed by licensed Investment or Fund Managers who are entrusted by the contributors to make educated investments on their behalf. Investment managers legally become trustees of the collective investment. An example of a licensed fund manager in Kenya is British American Asset Managers Ltd.

Each investor in a mutual fund is known as a unit holder and holds a number of units based on how much they invested in the unit trust. Units in a mutual fund give earning entitlement in a similar way that shares do in a company. More units held in a mutual fund give back proportionately bigger returns.

Advantages on Investing through a Mutual Fund or Unit Trust Scheme are:

• Professional Management – They give ordinary investors access to Fund managers with the necessary skills, networks and experience to make informed investments on their behalf.

• Affordability – Unit holders can afford to invest in a wide portfolio of shares or bonds that they otherwise couldn’t afford to invest in individually. In addition, the individual investment and dealing costs are lower for each unit holder compared to if they invested on their own.

• Lower risk – Because mutual funds often spread their investments across different shares and investments, there is a lower impact if one of the investment fails.

• Monthly contribution – Most mutual funds allow for unit holders to contribute on a monthly basis thus making it easier to build your investment. T

There are varying types of mutual funds in Kenya that are distinguished by the type of financial investments they make. Different mutual funds have different rates of return, minimum investment requirements and management fees which fund managers charge for their investing service. Investors decide on which mutual fund(s) to invest in based on the varying terms.

Here are the main types of mutual funds offered by the licensed fund managers in Kenya:

• Equity Fund – Mutual funds which invest in company shares only.

• Balanced Fund – Mutual funds which invests in a diversified portfolio of shares, bonds and the money markets.

The money market is basically a short-term loan market where the mutual fund in this case is the lender and gets returns through the interest levied on the loans to institutions such as banks and the government. Treasury bills, corporate bonds and term deposits are examples of financial instruments within the money markets. Such instruments are merely different ways of packaging the borrowing of large institutions.

• Bond Fund – Mutual funds which invest in government and corporate bonds. Learn more about bonds here.

• Fixed Income Fund – Invests in financial instruments which bring specific returns on specific dates; mainly bonds.

• East Africa Fund - Invests in the financial markets in surrounding East African countries.