6 Steps to Start Investing Money in Kenya

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Investing is one of the most reliable ways of building wealth. If you’re looking for a way to grow your finances, this article will help you figure out how to do it in Kenya.

The main thing to understand is that investing is personal. There’s no one-size-fits-all solution because everyone’s situation and circumstances are unique. However, there are universal principles, and this article will help you learn them.

We are going to cover how you can start investing money in Kenya in 6 steps:

  1. Identify your investing goal
  2. Decide your investing style
  3. Consider your budget
  4. Assess your risk tolerance
  5. Open an account
  6. Pick the best investment type for you

Altogether, these steps will help you make the ideal investment for your situation. But before we look at each one in detail, let’s see why investing is necessary if you want financial growth in today’s economic climate.

Why should you invest?

Most people opt to save as opposed to investing - and there's a good reason for that. Saving guarantees the safety of your money whereas investing has an element of risk.

The problem is, over the long term, saving carries some risks of its own, the most notable one being inflation. Your money’s purchasing power diminishes over time because the interest rates offered in savings accounts are simply too low.

Investing offers superior advantages over the long term, including:

  • Inflation protection - as the prices of commodities rise, so do the prices of some investment assets. Owning such assets gives you an edge because you also profit as their value increases, which means you’re not affected so much by inflation.
  • Higher returns - compared to saving, investing offers far superior returns. The rate of return on financial assets tends to be higher over the long term compared to those offered by traditional savings accounts. However, note that sometimes investments can also perform poorly than expected. The best way to guard against this is to invest for the long term.
  • Compound interest - this is where the interest that your money generates is reinvested and also produces interest of its own. You not only receive interest on the original sum invested but also on the interest produced and reinvested. Over time, as more interest is reinvested, the size of your overall investment keeps ballooning. This is called compounding.

What to do before investing

It’s important to start investing only once you have your finances in order. To help you with this, here are three questions to consider:

1. Do you have any high-interest debts?

It doesn’t make sense to invest if you're paying more in interest than your money will be earning. So if you have any debts that attract high interest, it’s advisable to either pay or replace them before you start investing.

2. Do you have an emergency fund?

The best way to invest is to do it without interrupting or selling your assets before you reach your goals. It’s therefore important to shield yourself from interruptions by building an emergency fund. Ideally, such a fund should have enough to cover at least 3 months of expenses. It should be in a high-interest account that can be accessed on short notice without charging penalties.

3. Do you understand the risks?

All investments are risky. There are no guarantees that you're going to make a profit, but the risk is correlated with returns. As a general rule, the riskier an investment is, the more potential returns it offers. Low-risk assets, on the other hand, offer lower returns too.

Before you invest, be clear on how much you're willing to put at risk. The idea is to find a balance whereby you can reach your goals without losing your hard-earned money. We’ll cover the topic of risk further in step #4.

6 steps to start investing money in Kenya

1. Identify your investing goal

Starting with your goal is the most crucial step because this is how you start narrowing down your investment options. Generally speaking, goals can be divided into short-term, mid-term, and long-term.

Short-term goals last up to 3 years and can include things like paying for higher education, doing a construction project, or saving up for a car.

Mid-term goals go up to 7 years and may include starting a fund for your children or acquiring some property.

Finally, long-term goals last 10 years and more. This is where investments perform the best because they have enough time to recover and bounce back if anything happens, plus they benefit from the power of compounding.

Suggested: Short-term vs long-term investing

2. Decide your investing style

When it comes to how they invest, all investors fall into one of two categories: active investors and passive investors.

Active investing involves doing everything for yourself. This includes doing the research to determine the best investment, buying the assets, building and maintaining your portfolio, and all other necessary investing activities.

Passive investing, on the other hand, is like investing on autopilot. Here, your investments are managed and maintained on your behalf by a professional. All you have to do is open an account and grant them your authorization. Users of mutual funds and unit trusts employ this method.

3. Consider your budget

The question to ask here is: How much can I invest?

One of the biggest misconceptions about investing is the idea that you need a lot of money. That is a complete fallacy. You can start investing with as little as KES 1,000 and still make decent returns.

As long as you intend to invest frequently and keep doing it for the long term, what you start with is not important. Over time, as you keep adding to your investments, your assets will grow and the returns will grow along with them.

You just have to make sure you have an emergency fund so that you're not forced to sell your investments prematurely and interrupt the growth.

Suggested: Strategic Investment Plan – How to plan & stick to your investing habits

4. Assess your risk tolerance

As mentioned, not all investments are successful. They each carry a different level of risk, but this also determines their return.

Take treasury bonds, for example. Since they are backed by the government, they are highly predictable and dependable to pay their investors, which makes them low-risk. This safety, however, means that their rate of return is lower compared to other assets like stocks.

Stock prices tend to rise and fall 24/7 depending on several factors. Such fluctuations make them riskier than other assets but over the long term, they result in better returns than those produced by other investments.

Even within assets, there are varying risk levels. Some stocks are riskier than others just like some bonds are safer than others. What's important is to find a balance between risk and return by adopting a safety strategy like diversification.

5. Pick the best investment type for you

Now that you're clear on your goal, your budget, and the amount of risk that you’re comfortable with, you can start choosing the most ideal assets.

If you have long-term goals and you’re willing to take on more risk, then you can opt for riskier assets like stocks. If your goal is to make short-term income using a low-risk method, then you can opt for safe assets like bonds and fixed-income assets.

In the same way, if you’re willing to do all your investments on your own - from asset research to portfolio management - you can opt for active investing. But if you simply want to automate your investing process and have someone else do the heavy lifting, you can invest passively.

Your individual goals and circumstances will inform the best approach for you. It’s therefore important to define all these things before buying anything.

Suggested: Blue Chips – The Best Dividend Stocks in Kenya

6. Open an account and start investing

To start investing in Kenya, you’ll need to open a CDS account. A CDS account works just like a bank account does except instead of holding money it stores your investments. All stocks or bonds you own will be put in your CDS account.

You can open one directly at the Central Bank of Kenya or it can be done for you by a stockbroker. And this brings us to the next thing - if you opt to invest actively, you’ll need a stockbroker, who’ll be buying securities from the market on your behalf.

For passive investors, you will need to identify a mutual fund provider who suits your specific needs. There are many such funds available in Kenya such as Old Mutual, CIC, and Britam. Be sure to compare who has the best rates and most convenient service before settling on a choice.

Read more: How to start investing in the Kenyan stock market

6 best types of investments for beginners in Kenya

The most common types of investments for beginners in Kenya include shares, bonds, mutual funds, REITs, high-yield savings accounts, and SACCO shares.

  • Stocks - also known as shares, they are representative of ownership in a company. Shareholders benefit in two ways:  by earning dividends and through capital growth. You can buy shares directly from the stock market or indirectly through mutual funds and unit trusts.
  • Bonds - bonds are loans that are given to organizations by the public. Buyers of bonds usually lend their money to businesses and receive regular interest payments in return. Once the agreed loan duration is complete, they are refunded their principal back. You can buy bonds either directly from the government or through the stock market.
  • REITs - a REIT is a company that specializes in investing in real estate. It consists of multiple investors who combine their resources, hire a manager to build or buy properties, and then collect income on their behalf. In Kenya, you can buy shares of the ILAM i-REIT at the Nairobi Securities Exchange or shares of the Acorns REIT on the Vuka platform.
  • High-yield savings accounts - these accounts work exactly like traditional savings accounts but with higher interest rates. The catch is that you have to keep your money in the account for a fixed time limit or you won’t get the set interest rate. Examples of such accounts include fixed-deposit accounts. These are offered by most banks so all you need is to compare the different rates and settle on a choice.
  • SACCO shares - investment-focused SACCOs offer some of the best returns because they own assets that they use to generate high yields. SACCOs also pay some of the best dividends, generated from their loaning activities to their members. The best ones pay up to 12%, which is very competitive considering that most stocks don’t even make that much.
  • Mutual funds - a mutual fund is a fund that uses money collected from many investors to invest in selected securities. This can be anything from stocks to bonds to real estate. They are great for beginners because they are managed by professionals and provide diversification. There are several such funds in Kenya with the most popular being CIC Asset Management and Old Mutual.

Further Reading: 5 Common Types of Investments in Kenya

Over to You…

Investing is instrumental in unlocking financial freedom and as we’ve seen, it requires a good amount of planning to do correctly.

At the core, you need to be clear on your goals and be consistent to grow your investments over the long term. You don't need a lot of money to get started, but you have to invest frequently over time to unlock your goals.

So as you prepare to start, think about what you want to achieve and then go from there.