The framework for index funds in Kenya

Abstract

The study set out to assess the institutional and regulatory framework for index funds in Kenya. The study set to find out whether there are factors in place that may be able to support the introduction of index funds. The need for the study emanated from the apparent inability of fund managers to outperform the market as represented by an unmanaged index. This study builds on the passive versus active management strategies in the Kenya capital market. The study looked at the importance of index funds to the financial system and how the index funds would benefit the investing public. It also examines the Kenyan investor profile to see whether it matches the investor characteristics associated with Index funds. The structure of the capital market and the characteristics of fund managers were explored to find out whether they support passive or active investment strategies. Focus was also placed on the current state of the legal and requlatorv frarnework and how well investors are protected in the Kenyan market. Finally, the capital market was examined to determine the existence of Index funds' critical success factors. There was sufficient evidence of the existence of factors that form the framework for index funds. However, a number of issues such as inefficiency of the capital markets, lack of adequate regulation and investor protection need to be addressed for the successful introduction of Index funds into the Kenyan Capital market.