Bank money market accounts are becoming more competitive with money market funds offered by unit trust companies.
An agreement last year between the unit trust industry and the banking sector means you can now operate your unit trust money market fund like a virtual bank account where it can be linked to cheque accounts and other cash management facilities.
This agreement has brought local money market funds in line with the way these funds have developed overseas.
Chris Swart, senior manager of Standard Bank's Linked Investment Services, says it is the ability of unit trust money market funds to offer you these facilities that has prompted banks to start offering money market accounts that give you "equal" benefits, sometimes even surpassing those of unit trust money market funds.
In most countries money market funds and money market accounts are used as a "parking place" for funds waiting to be invested elsewhere, or as a refuge when there are fears of a stock market crash.
* Unit trust money market funds: These funds invest in the wholesale market where banks lend and borrow short-term money money that is borrowed for a period of one day to 12 months.
Regulations relating to these funds stipulate that they should invest in approved money market instruments such as bankers' acceptances, negotiable certificates of deposit, bridging bonds, debentures, Land Bank bills and treasury bills.
Unit Trust money market fund managers lend your money to various institutions which need short-term funds. Interest is paid on these deposits which is then paid back to you.
Unlike money invested with banks in normal bank deposits, there is no fixed interest rate. Instead, your yield fluctuates according to the interest earned on the investments in the fund.
So, money market funds pool your money with that of other investors to get better rates on what is called the wholesale market. As a result you generally get better interest rates than those offered by your bank.
Returns on money market funds are based on short to medium term interest rates and are normally relatively stable.
These funds also enable you to deposit and withdraw your money at any time without being penalised or losing the interest.
* Bank money market accounts:
Swart says bank money market accounts also offer high levels of accessability and interest rates that are linked to short term money market instruments. These accounts are like call accounts, but linked to market rates.
Swart says bank money market accounts compare favourably with unit trust money market funds as far as costs are concerned. With the unit trust fund you have to pay annual fees and initial fees; with the bank money market account you pay regular banking fees.
Another difference between money market funds offered by unit trust companies and those offered by the banks is the method of calculating interest. A unit trust money market fund calculates interest on a rolling seven-day average. Bank money market accounts, regulated calculate interest daily and capitalise monthly for compounded growth.