OPERATING COSTS, FUND SIZE AND FINANCIAL PERFORMANCE OF MONEY MARKET FUNDS IN KENYA

Money market funds play a role in Kenya’s financial system by providing managed short-term investment opportunities. Despite operating under a common regulatory framework and investing in similar low-risk instruments, funds continue to report varying investor returns, raising questions about the determinants of financial performance. Operating costs are important because they may reduce investor returns through expense deductions or enhance performance by supporting research, technology, compliance, governance and investor services. This study examined the effect of operating costs on the financial performance of money market funds in Kenya and assessed the moderating effect of fund size. Anchored on Transaction Cost Theory, the study adopted a positivist philosophy and an explanatory longitudinal panel research design. The target population comprised 45 licensed money market funds operating in Kenya between 2020 and 2024. Although a census approach was adopted, data availability resulted in an unbalanced panel of 88 fund-year observations from 19 funds. Secondary data were obtained from audited financial reports and regulatory disclosures using a structured data collection sheet. Data were analysed using pooled panel regression with year fixed effects and fund-clustered robust standard errors after diagnostic tests.The findings showed that operating costs had a positive but statistically insignificant direct effect on financial performance (β = 0.1633, robust SE = 0.0975, z = 1.6747, p = .0940). Fund size also had no significant direct effect (β = −0.0361, p = .4232). However, the interaction between operating costs and fund size was positive and statistically significant (β = 0.2805, z = 5.0393, p < .001), indicating that fund size significantly moderates the relationship between operating costs and financial performance. Thus, the effect of operating costs becomes increasingly positive as fund size increases, suggesting that scale influences the productivity of operating expenditure. The study recommends that fund managers adopt a Cost-to-Scale Scorecard linking operating costs to fund size, investor value and net yield. Scale-based cost benchmarks should identify inefficient expenditure, while smaller funds should consider shared technology, compliance and administrative platforms to enhance economies of scale. Regular cost-productivity reviews are recommended to ensure operating expenditure contributes to improved investor returns, efficiency and service quality.