Kenyan investors need to reconsider how they value liquidity
For thousands of Kenyan investors, the maturity of a government bond can feel like a success that creates an immediate question: what should this money do next?
That question is especially relevant as substantial government bonds mature and coupon payments return billions of shillings to investors. The instinct may be to search for another bond offering the kind of return investors became accustomed to when yields approached 18 percent in 2024.
Those unusually high returns were not free money. They reflected high interest rates, pressure on the shilling and concern about Kenya’s sovereign risk. Those macroeconomic conditions have changed and so should the way investors think about reinvestment.
The better question is not, “Where can I get the same return?” It is, “What is my next investment objective for this money?”
A 12 percent return today is not necessarily less attractive than an 18 percent return two years ago. Returns should be assessed in the context of inflation, taxes, liquidity, currency movements and risk.
Chasing higher yields can push investors into risks they may not fully recognise like longer investment periods, weaker credit quality or reduced access to money. The lesson from 2024 is not to expect 18 percent returns, but to recognise that returns change as market conditions change.
An investor who will need the money within months has a different problem from someone saving for retirement in 15 years. A business owner managing working capital has different requirements from a parent investing toward university fees five years from now.
Yet investors often compare products mainly by advertised return. A better reinvestment decision starts with three questions: When will I need this money? How much must remain readily available? How much risk am I comfortable taking?
For money that may be required at short notice, liquidity can be more valuable than an additional percentage point of return. Money Market Funds and short-dated government securities can play that role. For medium-term objectives, investors can consider Fixed-Income Funds and other diversified income investments, taking account of fees, risk level, duration and redemption terms.
Longer-term government bonds may suit investors who can invest for longer and tolerate changes in bond prices. There is no single best option, each investment serves a different purpose. Waiting can also be costly. Leaving maturity proceeds in a low-interest account means missing out on potential returns while you decide what comes next.
Inflation reduces the purchasing power of idle money, while investors give up returns the money could have earned. The same principle applies to coupon payments.
Consider an investor holding a Sh1 million bond paying a 10 percent annual coupon. That generates Sh100,000 a year before applicable taxes and transaction costs. If those payments are consumed or left idle, the investor receives the coupon but loses the opportunity for those earnings to generate further returns.
Compounding works because returns are put back to work. This does not mean every shilling must immediately go into another long-term investment. It means investors should decide what happens to principal and coupons before the money arrives.
Kenyan investors also need to reconsider how they value liquidity. Government bonds can provide predictable coupon income, but anyone who needs principal before maturity may have to sell in the secondary market at a price shaped by prevailing conditions.
This becomes particularly relevant when the outlook for interest rates, inflation, government borrowing and political risk is uncertain.
Putting all your money into one long-term investment means taking a significant risk on future market conditions.
Investors do not always need to make that bet. Reinvestment can be staggered across maturities and instruments: some money can remain liquid; some can meet medium-term income needs and capital that will not be required for years can be invested over a longer horizon.
The headline return is not always what you take home. What matters is the return after taxes, fees and inflation, relative to the risk taken.
A fixed deposit, Treasury bill, government bond, corporate bond, money market fund and fixed-income fund cannot be compared on yield alone. Investors should examine tax treatment, fees, credit risk, interest-rate risk, liquidity and commitment period.
Currency deserves similar discipline. Dollar assets are most useful when they match your income, future expenses or need for currency diversification. The simplest change investors can make is to plan before maturity.
A maturity date is known well in advance. That gives investors time to review obligations, establish liquidity needs, compare available investments and decide how proceeds should be allocated.
Long-term investment success is not about chasing the highest return. It is about giving every shilling a clear purpose and investing accordingly.
The writer is Portfolio Manager, Jubilee Asset Management
