As Kenya’s investment space becomes more sophisticated, investors have a multitude of options to pick from. Generally, this is a good thing since it enhances financial inclusion. However, someone who is just starting out may be confused about which fund to sink his/her capital into. Take for example how fund managers offer one version of a fund in Kenya shillings and another denominated in a foreign currency. As a novel investor, which one should you choose?
Unless stated otherwise, all investments you make in Kenya are KES-denominated. This does not necessarily mean that your funds are invested in Kenyan assets only. It just connotes that your capital and any returns you earn will be accessible to you in Kenya shillings.
On the other hand, some fund managers offer specialised alternatives of their funds that are denominated in a foreign currency, most commonly the US dollar or the British pound. Usually, these funds are identical to their KES counterparts apart from the base currency and the rate of return on offer.
There is an obvious temptation to go for funds that are denominated in USD or GBP over KES regardless of your situation. However, foreign currency-denominated funds are designed for investors whose receivables are in the same currency. Basically, if your salary, rental income or any other money you make is in USD, you should invest in a USD fund. The same goes for GBP or any other foreign currency. Investing in this manner will help you eliminate currency exchange risk. Similarly, if most of your income is in KES, prefer the KES version of the fund.
Does this mean that you cannot invest in a USD fund if most of your receivables are in KES? No, it doesn’t. In fact, there may be benefits to investing in a foreign currency based fund. For starters, it will allow you to diversify your local currency investments by including some foreign currency exposure. Additionally, it reduces the outflow of foreign currencies from Kenya, leading to a more active investment space. However, investing in a fund whose base currency is not the same as your receivables exposes you to currency exchange risk.
In conclusion, the main reason you should invest in a fund that is denominated in a foreign currency such as the USD or GBP is if your earnings are in that currency. You can still invest in a foreign-denominated fund if your receivables are in KES, as a way to diversify your local currency investments, but at the risk losing value from the conversion.