How inflation in Kenya affects your investments

In this post, we will discuss how inflation in Kenya affects your investments and how to work around it. One of the best things I have done is to create this Telegram Group. It has grown to over 2,900 members. Above all, it has happened within 8 months!

As a result, we are quickly forming a pool of people who share their ideas in the group. Join us. Add your family and friends. Then, we can all learn and grow our money together 🙂

Recently, we had a long chat on how inflation affects investments such as money market funds in Kenya. I will share my views and summarize the chat.

What is the inflation rate in Kenya

Firstly, inflation is the rise in the price of a basket of goods. There are harder definitions but I like to keep things simple 🙂 So, I am guessing some guys who love chalk dust sat down and decided what goes into this basket of goods.

Since, I don’t like chalk dust, I always tell people to understand the concept but use the inflation rate as a guide only. Because, let’s say the basket includes a bottle of beer. So, if the price of beer increases, the price of the basket in total (inflation) goes up. However, does it really affect those who don’t drink beer? A better way would be to track the changes in the price of your basket of goods. For example, your shopping bill over a certain period.

However, most of us don’t have that time. Also, #ChalkDustJobsMatter. So, we accept the price of the basket of goods (inflation) for all of us. Currently, at 31 October 2019, the inflation rate in Kenya is 4.95%. The average inflation rate in Kenya in 2019 is 5.19%. I update the rates monthly but if you like chalk-dust data then find it here and here. Let’s say a silent prayer for the chalk dust joke.

How does the inflation rate in Kenya affect you

Above all, you should aim to grow your money (investing) faster than the rise in the price of the basket of goods (inflation).

If you don’t do the above then your money will slowly lose its ability to buy things (purchasing power). You know that one friend who does the thing. Similarly, inflation can be silent but deadly!

People like to make fun of mattress bankers! Yes, it doesn’t make sense to stash your money at home. You are certain to lose your purchasing power. Secondly, you can lose the whole amount if it’s stolen. However, others allow inflation to creep silently and but in deadly ways to their finances. Mainly, it’s because popular ‘investments’ don’t earn enough to beat the inflation rate.

Silent ways to lose money to inflation

  • Current accounts (no earnings).
  • Savings accounts (low returns).
  • Table banking chamas with no investments.
  • Loans where the money is spent or invested in loss making or low return projects.
  • Investing in get rich quick schemes which eventually go bust.
  • Booked losses – Always invest money you can afford to lose. This gives you the ability to hold on during periods of low or negative returns. For example, the recent bear run at the NSE. Certainly, stocks outperform all other asset classes in the long term. However, buying when prices are high (due to greed) and selling when prices are low (due to fear) will end you.
  • Betting and gambling – It is known that the house always win! In other words, the business was set up to make money.
  • Education insurance policies
  • 52/(xx) week challenges – saving money in jars or in M-Pesa accounts is not an investment. To clarify, an investment is anything that earns you a return in cash over time.

Comparison of the returns of various asset classes against the inflation rate in Kenya

Asset Type
May 2019
Inflation Rate
Asset return
Real return
= b-a
Savings account5.04% 4.71%-0.33%
Fixed deposits5.04% 7.2% 2.2%
Money Market Funds – CIC MMF5.04% 9.88%4.8%
NASI All Share Index (NSE Kenya)* 5.04% 6.55%1.5%
Sacco deposits – My Sacco 5.04%8.25%3.2%

Click on the %s for the data source. May, 2019 was the latest period with comparative data for the asset classes in Kenya. Therefore, I used the data for the table.

*NSE is a paper return. You only make/lose money from selling the investment or from earning dividends. For example, people who bought bank stocks during the bear run when they were cheap have and sold in the November 2019 rally and made over 17.5% in returns.

Inflation and Money Market Funds (MMFs) – Telegram Chat

It was agreed that MMFs are low risk investments. Higher returns can be earned in other asset classes. However, these may come with higher risk i.e. One can lose 50% of their investment in a week! Likewise, they can double their investment in the same period. Therefore, investors need to consider their risk appetite and the investment period.

Currently, MMFs are earning above inflation in Kenya (and have done so in the past). That is to say, you are growing wealth without losing purchasing power. Secondly, the underlying investments for MMFs (mostly Treasury Bills) will pay above inflation so as to attract capital.

Remember, your aim as an investor is to grow your money at a rate higher than inflation.

Nash Thuo

Increasing demand for MMFs in Kenya

MMFs continue to be the main discussion point in the group. Certainly, it’s because they are the only asset class covered so far in detail. There are other ways to invest in Kenya and globally. I will cover them in detail in future lessons. As a result, you will be able to diversify safely into other asset classes based on your risk profile.

Other than the above, my observations on the increasing interest in MMFs are:

  • Kenyans are looking to preserve their hard-earned money. This could be due to the economic conditions such as the layoffs. Further, the many scams and/or misleading investments such as education insurance policies have led them to seek safe MMFs.
  • People now understand the power of compounding. They have realised that over time anyone can grow wealth. MMFs just happen to offer the building blocks for this. That is, low risk, flexibility, automatic compounding and inflation beating returns.
  • Readers with a high risk appetite are opening MMF accounts to park their windfalls. This is brilliant as it locks in the gains. See Tony Robbins’ article.
  • Passive income i.e. money starts working for you as interest earns more interest.
  • It is easy to start the investment journey with MMFs.

How to calculate the real return of investments in Kenya

My compounding template can help you view the growth of your money in real returns. That is, you are able to see exactly how much your money can purchase in ‘x’ years. See the video below on how to use the power of compounding to grow your wealth in Kenya:

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