The Best: How Fixed Income Funds Work in Kenya

For a long time many times, a lot of would-be and junior investors, and even pros, have been unable to clearly tell what fixed income funds (FIFs) are, how they work, and what they actually entail. In most cases, many tend to confuse them with money market funds (MMFs), but they are not really the same.

Both FIFs and MMFs are financial instruments that help investors achieve their financial goals. However, fixed income investments generally consist of national government bonds, county government bonds, and corporate bonds, while money market securities typically include cash and cash equivalents and other highly liquid short-term debt securities.

The key difference is that money market funds invest in short-term opportunities only, while fixed income funds invest in medium- to long-term opportunities, as per capital market laws.

What are fixed income funds simply in Kenya?

A fixed income fund in Kenya is a fund that primarily invests in bonds or other fixed income securities issued by the Kenyan government and corporations. Fixed-income securities are commonly referred to as bonds.

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By itself, it is an asset class that is a commonly held investment because it helps preserve capital more than even money market funds, I would say. If you are looking to build up a well-diversified portfolio, you will usually be advised to include both fixed income funds and money market products among your investments. But while MMFs may offer you the potential for quick capital appreciation and liquidity, FIFs promise fixed amounts of cash flows at fixed dates over a specified term, plus repayment of the principal amount at maturity.

How do they work?

A fixed income investment is essentially a loan that an investor gives to an issuer. The issuer can be a government or a corporate borrower. One way a government or a company can obtain the money they need to fund their projects or initiatives is to sell bonds in the form of a fixed income fund.

So, when you invest in a fixed income fund, you’re loaning money to a government or company for a set period. During this time, you will earn a fixed rate of interest, known as a ‘coupon,’ at scheduled intervals, while awaiting repayment of your initial principal amount on the agreed maturity date.

Think of yourself as a lender, providing funds to corporations or governments in exchange for regular returns until maturity, when your initial investment will be returned.

For instance, Julius owns a large publicly traded company, like Safaricom, that has been around for almost 15 years. The company has a positive reputation for doing business and has emerged as one of the largest, most successful firms in Kenya. Julius wants to expand the company to other countries, but he has limited capital.

While looking for investments, he notices that the Central Bank interest rates have been quite low and are most favourable for borrowers. This means that his company would get the greatest deal and best value from a fixed income loan, so he sells a five-year Ksh5,000,000 bond to investors at a 10% rate of return per annum.

Gloria, looking for a stable investment that provides steady returns, decides to purchase Julius’s bond. As such, she will get Ksh500,000 per month (assuming it’s untaxed) for the next 5 years as bond interest payments. And once the 5-year bond has matured, she will receive the Ksh5 million principal amount back as well.

While most standard fixed-income investments like Julius’s typically involve the borrower making regular interest payments to the investor, some do not. These are known as “zero-coupon securities.” Zero-coupon bonds do not make periodic interest payments. Instead, they are sold at a discount and redeemed at full face value upon maturity. The investor’s profit is the difference between the purchase price and the bond’s face value.

Fixed-income assets are a key component of diversified investment portfolios, designed to offer steady income through regular interest payments.

All said and done, the amount of interest offered in FIFs varies considerably. It is given as a percentage, much like how a typical cash savings rate would be;

The best fixed income funds in Kenya (2025)

The following are the fixed income funds with the highest interest rates in Kenya in 2025:

With interest rates on cash savings low, fixed income investments attract investors as they offer higher fixed yields. In contrast to MMFs, however, because FIFs carry lower risks and potential tax exemptions, their returns are generally lower than those of equities and shares.

Even so, like all investments, the price of a bond can fluctuate throughout its life. These fluctuations are influenced by the current interest rate environment and inflation, meaning that any income derived from them is not guaranteed, and you may get back less than you invested.

Additionally, some bonds are denominated (and the issuer’s payments made) in foreign currencies, which could pose a risk of capital losses and lower returns when they are converted back to local currency in the event of massive depreciation.

Business Today does not provide investment advice. If you are uncertain about the risks or suitability of an investment, seek guidance from an independent financial adviser.

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