Investing

Why Some Kenyan Income Funds Are Paying Less - And What to Do About It

Your income fund yield dropped and you are not sure why. Here is what is driving the divergence between funds, and how to respond.

March 1, 2025 3 min read PesaCalc Editorial 530 words

If you have been invested in a Kenyan income or money market fund over the past 12 months, you may have noticed your annualised yield changing. Some funds held up. Others dropped significantly. Understanding why, and what to do, requires a brief look at how Kenyan bond markets and interest rate policy interact with fund performance.

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Between Q3 2023 and Q1 2025, the divergence in returns across Kenyan income funds widened significantly. The spread between the top and bottom quartile performers grew from approximately 2.1% in 2022 to 4.8% in 2024. Fund selection now matters more than it did two years ago.

What Drives Income Fund Returns in Kenya

Kenyan income funds primarily hold government securities (T-bills and bonds) and bank deposits. Their yields are therefore driven by:

Central Bank Rate (CBR)

When CBK raises the CBR (as it did aggressively in 2022–2023), T-bill rates rise and fund yields improve. When CBK cuts rates (as it began doing in late 2024), new T-bill purchases earn less, but existing bond holdings maintain their original yields until maturity.

Portfolio duration

Funds holding longer-duration bonds (5–10 year government bonds) locked in 2023's high rates for longer. Funds primarily holding short-duration T-bills (91-day, 182-day) felt rate cuts faster as their portfolio rolled over into lower-yielding new issuances.

Manager skill and fee levels

Two funds with identical portfolios can show different net returns based solely on management fee structure. A 2% annual fee on a 12% gross yield costs 17% of your return to the fund manager.

The Funds That Are Holding Up vs. Those That Are Not

Generally, funds that performed better through the rate-cut cycle share these characteristics:

Characteristic	Better Performers	Weaker Performers
Portfolio duration	Longer (locked in high rates)	Shorter (rolling over at lower rates)
Private credit exposure	Higher (private rates less CBK-sensitive)	Lower (pure government securities)
Management fees	Lower TER	Higher TER
Fund size	Larger (better terms from banks)	Smaller (less negotiating power)

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What You Should Do Now

Request your fund's current fact sheet

Compare this quarter's yield to the same quarter last year. A drop of more than 2% warrants investigation. A drop of 4%+ suggests the fund was primarily short-duration and has been heavily affected by rate cuts.

Compare against peer funds

If your fund is at 9% and comparable funds from other managers are at 11.5%, the gap is significant. Over 3 years on KES 500K, that 2.5% difference is approximately KES 43,000 in foregone returns.

Consider diversification across fund types

A mix of a liquid MMF and a longer-duration fixed income fund provides both accessibility and rate-cycle resilience. When short-term rates fall, your long-duration holdings provide buffer.

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Do not chase yesterday's returns. The fund showing the highest yield today may have been holding long-duration bonds that benefited from 2023's high rates. Those bonds will mature, the portfolio will roll over at current lower rates, and the yield advantage will disappear. Look at 3-year track records, not current yields in isolation.

Yield Compression Is Cyclical

The CBK rate cycle will eventually turn again. Investors who understand this, and who use the lower-yield period to build larger positions that benefit from the next rate rise, are better positioned than those who chase yield by moving to higher-risk instruments at the wrong moment.

Model how different yield scenarios affect your investment projections using PesaCalc's Investment Growth Calculator.

Topics covered

#income funds #kenya investments #CBK rate #bond market #returns #investing

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