The Effect of Interest Rate and Inflation on Growth of Collective Investment Schemes in Kenya

Abstract

The importance Collective Investment Schemes as an investment vehicle today lies in the fact it’s the most effective ways of mobilizing savings and investments across the socioeconomic divide especially from small investors who are locked out from other importance investment opportunity. This paper evaluates the effect of interest rate and inflation on growth of collective investment schemes in Kenya for the period 2004 to 2013. The study adopted descriptive research design. The study targeted collective investment schemes registered under asset managers licensed by Capital Market Authority. The data was on total asset growth of the asset managers, interest rate, inflation, GDP growth rate, total funds returns got from CMA and Kenya National Bureau of Statistics. The effect of the independent variables on collective investment schemes’ growth was analyzed using multiple linear regression models and Pearson correlation analysis. The study’s findings show that positive and significant correlation between total asset growth, and interest rates and inflation rate. Negative and significant correlation between total asset growth and total funds returns. Moderate linear relationship (39.7%) existed between interest rate, inflation rate and total asset growth of the collective investment schemes. It is concluded that interest rates and bonds positively affect collective investment schemes growth since as investors constantly compare the scheme’s returns on their current investments to what they could get elsewhere in the market. As market interest and inflation rates change, the schemes’ returns becomes more or less attractive to investors, who are therefore willing to pay more or less for them. The study recommended that investors need to invest in diversified funds to ensure high return as different types of funds performed differently, take great care that the profile of the CIS meets their needs and risk profile.