I have Sh1,325,000 available for investment and can contribute an additional Sh28,000 monthly for the next 10 years. I hold a Money Market Fund account, which yields returns of 8.25 per cent to 11 per cent per annum (net of fees and withholding tax). Based on my own projections, this would amount to approximately Sh8.2 million after 10 years.
However, I have read that money market funds may not be ideal for long-term goals due to relatively limited compounding effects compared to other investment vehicles. I have simulated potential returns across balanced, bond, and equity funds, but the results appear relatively similar to the money market projections.
I understand that market performance cannot be precisely predicted, but I need guidance on how best to allocate my funds to maximise returns while maintaining a moderate risk profile. My key financial goals include building a home and educating my two sons within the next 10 years. Which is the most suitable investment mix or strategy to help me achieve these objectives? — Clifford
Benjamin Cheruiyot is the Engagement Lead at Abojani Investments, a personal finance and investments advisory firm
You have accumulated a decent amount of savings that can easily set you towards financial freedom in a decade. It is also commendable that your savings are attached to goals. While the simulated 8eight per cent net returns project a total of Sh8.2 million in a decade, a more diversified asset portfolio should give near Sh10 million, even from a conservative investor's perspective with net returns of 10 per cent annually.
Money market funds typically return between eight per cent to 11 per cent annually. While they aren't efficient as wealth creation tools, they are vital for short to medium term goal setting and emergency fund accumulation. It is necessary to keep at least three months' equivalent of regular expenses in an MMF as it allows ready access. This will help you meet unexpected expenses like medical, car repairs, family celebrations, and so on.
The cost of building your family house depends on the location you wish to live in, plus your family size. A three-bedroom house will cost between Sh2.5 million to Sh4 million. This is subject to the quality of materials used, transportation, and finishing quality. If you delay for five years, these costs will rise by about 40 per cent.
If you already have land to build on, start assembling core materials like stones, ballast and sand. Settle on a building plan that matches your taste and preferences, and getting it approved by the relevant council authority in your area. Once these are done, you can consider phasing out your project on a pace that will not strain your finances. For example, you may set up the foundation and the slab, then take a break before setting up the walling stage.
You may also consider taking a loan if you are not stretched on loan commitment. Look at your budget to determine your loan repayment ability. You need at least Sh2 million for 80 per cent completion of the project. This can cost you Sh40,000 monthly at 15 per cent loan interest for 72 months. If unable to service this, you could opt for Sh1.5 million at Sh30,000 for the same period. This will do at least 50 per cent construction progress. With the structure off the ground, you can complete it at your own pace and with your own savings.
Your children's education expenses can be met with MMF interests. Sh1.3 million kept in an MMF that nets 10 per cent annually typically yields Sh11,000 monthly. Keeping these interests reinvested will help achieve education costs with ease. Having a mix of asset classes, for example, Sacco deposits, treasury bonds, dividend stocks, unit trust funds, and hedge funds, can help achieve more than 12 per cent annual returns.
Carefully selected NSE stocks, for example Stanbic, Standard Chartered, Williamson Tea, and BAT, can achieve both income and growth objectives. Investing Sh1 million in treasury bonds will earn Sh60,000 every six months throughout the bond tenor. Fixed Income Funds by leading fund managers give between 11 per cent to 13 per cent in net annual interest.
With the Sh1.3 million that you have, put Sh500,000 in a fixed income fund to earn at least Sh55,000 annually. Invest another Sh500,000 in a treasury bond for at least Sh60,000 annually. Deposit Sh325,000 in a money market fund to build an emergency fund or a sinking fund towards your sons' education.
Accumulate monthly savings of Sh28,000 in a money market fund for target investments in dividend stocks, special (hedge) funds, more treasury bonds, and so forth. Doing this consistently will result in more than Sh6 million accumulated at net returns of 12 per cent annually. Should you wait 10 years to begin building your family home? Certainly not! Start now and do it in phases. You can complete it in under five years and move on to other goals.
If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered here
