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There is something a friend of mine wants to know about Money Market fund. He wants to know if the interest added to his capital is compound or simple interest.
If he has a million naira and it is 10% compounded annually, it means if in the first month the interest added is 10000, in the second month, it should be more than 10000
Please throw more light on this especially about the interest.
Your friend is mixing two different things: annual rate vs how returns are actually credited in a money market fund (MMF). Let’s clean it up precisely. 1. Money Market Funds don’t use “simple interest” the way bank loans do A Money Market Fund (like those from GTCO, Stanbic IBTC, or ARM Investment MRead more
Your friend is mixing two different things: annual rate vs how returns are actually credited in a money market fund (MMF). Let’s clean it up precisely.
See less1. Money Market Funds don’t use “simple interest” the way bank loans do
A Money Market Fund (like those from GTCO, Stanbic IBTC, or ARM Investment Managers) works differently:
Your money is pooled and invested in short-term instruments (Treasury Bills, Commercial Papers, etc.)
The fund earns income daily
That income is added back to your investment (reinvested automatically)
👉 So in practice, MMFs are compounding, not simple interest.
2. Why your friend’s example is slightly wrong
He said:
“10% annually means ₦10,000 first month, then second month should be more”
That’s not how annual yield works.
Correct breakdown:
₦1,000,000 at 10% per year
Monthly equivalent ≈ 10% ÷ 12 ≈ 0.83% per month
So:
Month 1: ~₦8,300 (not ₦10,000)
Month 2: slightly more than ₦8,300 (because of compounding)
3. How compounding actually works here
If returns are reinvested, then each period builds on the last.
This is the standard compound formula:
Where:
= ₦1,000,000
= 10% (0.10)
= compounding frequency (often daily in MMFs)
= time in years
4. What happens month-to-month (realistic view)
Let’s simplify assuming monthly compounding:
Month 1:
₦1,000,000 × 0.83% ≈ ₦8,300 → Total ≈ ₦1,008,300
Month 2:
₦1,008,300 × 0.83% ≈ ₦8,370
Month 3:
₦1,016,670 × 0.83% ≈ ₦8,440
👉 Notice:
Interest increases gradually, not jumps to ₦10,000
The increase is small because compounding is happening on a monthly/daily fraction of 10%, not the full 10%
5. Key insight (this is what your friend needs to understand)
MMFs are compounded returns in practice
But the rate is quoted annually, so:
Monthly gains look smaller
Growth is gradual, not dramatic
6. One more important reality (very critical)
Money Market Fund returns are:
NOT fixed like a bank FD
They change daily based on market rates (Treasury bill yields, etc.)
So:
Today → 10% annualized
Next month → could be 9% or 12%
Bottom line
It is compound growth, not simple interest
But the compounding is on small periodic returns, so the increase per month is gradual
Your friend should expect slightly increasing monthly earnings, not big jumps