Looking for a safe place to park your money during volatile markets or simply a low risk investment offering a relatively good interest rate and immediate access to your money?
A money market unit trust or a money market deposit account could be what you need. Charlene Clayton explains.
If the thought of losing your capital is causing you sleepless nights, then a money market investment could be your investment of choice. You have two options: a money market unit trust and a money market deposit account.
The main difference is that money market deposit accounts operate like bank accounts and allow you to transfer money, put stop and debit orders on your account and make deposits into the account from an ATM.
A money market unit trust, on the other hand, operates like any unit trust account. Money market unit trust funds are slightly less risky than money market bank accounts in general. But, says Leon Claassen of CA Ratings, a specific money market unit trust may be more risky than a specific deposit account depending on the spread and type of underlying investments and the particular bank deposit account you have in mind.
Money market unit trusts also tend to pay a slightly higher interest rate, access to your money is slightly longer and the cost structures are different to money market deposit accounts.
The chief differences are:
STRUCTURE
* Money market deposit account
Dave Jarvis, the manager of investment products and retail banking at Standard Bank, says a money market deposit account is essentially a deposit account that provides you with easy and convenient access to your funds and you get returns that are generally higher than normal savings accounts.
The bank sets the interest rate using the money market and other investment rates as a guide.
* Money market unit trust
A money market unit trust is a unit trust fund that pools the money invested by investors and invests these assets in money market instruments. When you invest in a money market unit trust you are a part owner of the underlying assets and your investments are valued on a daily basis, says Tania Miglietta, portfolio manager at Investec Asset Management.
TRANSPARENCY
* Money market deposit account
Money Market deposit accounts are aligned to movements in the short-term money market, but you are not told how the bank arrives at the exact interest rate it pays investors. Information on the actual interest rate payable is obviously available.
* Money market unit trust
As a unit trust fund, a money market unit trust is strictly regulated and has to comply with rules and regulations of the Association of Unit Trusts and the Financial Services Board, the official watchdog of the financial services industry in the country.
Investment guidelines for money market funds are set. For example, these funds may invest a maximum of 30 percent of their assets in the top four banks and a maximum of 20 percent with the smaller banks. Unit trust funds have to report regularly on how their assets are
performing and you can check this in the newspapers on a daily basis. Look in the domestic fixed interest: money market funds category for a full list.
RISK
* Money market deposit account
Your capital is guaranteed and interest rate paid by the bank is guaranteed as long as you maintain minimum balance requirements. Your interest payments are also assured although the rate changes on a regular basis in line with changes in the money market. The only danger is if the bank should be liquidated, but the chance of an established bank being
liquidated is small.
* Money market unit trust
A money market unit trust is less risky than the deposit account because you suffer only partial loss of your capital if one of the banks or institutions in which the fund is invested goes belly up. Unlike a deposit account you are not exposed to one institution only.
Within the spectrum of different types of unit trusts, money market funds also offer the lowest risk.
INTEREST RATES
* Money market deposit account
In the case of money market deposit accounts, the interest rate payable on your investment is reviewed regularly by the bank. The interest due to you accrues daily and is added to your account once a month.
* Money market unit trust
Money market instruments in which the unit trust fund is invested deliver an interest yield, which varies daily. This is called a distribution and is passed on to investors. The interest due to you will be added to your account monthly. It can be paid out to you or you can choose to reinvest it.
INVESTMENT RETURNS
* Money market deposit account
Bank deposit accounts tend to be tiered and, if the bank offers a rate on amounts under R20 000, these are similar to ordinary savings plan rates. The rates on amounts over R20 000 are more competitive and more in line with actual money market rates.
* Money market unit trust
Money market unit trusts tend to pay on average one percentage point more in interest on investments than the bank deposits. These unit trusts do have minimum investment amounts, but after that any amount qualifies for the same rate of interest.
MINIMUM INVESTMENT AMOUNT
* Money market deposit account
The minimum can be as low as R5 000, but you generally need to invest R20 000 or more to enjoy good interest rates.
* Money market unit trust
The minimum investment in a money market unit trust varies between companies. The minimum lump sum can be as low as R5 000 (Sanlam) or as high as R50 000. The minimum monthly investment, which is usually by debit order, is R200 but can be as high as R10 000. Companies such as Investec, Liberty, Old Mutual and PSG, only accept lump sum investments.
ABILITY TO TRANSACT
* Money market deposit account
You can have the ability to do transactions such as make withdrawals and deposits, draw statements and transfer money between accounts like you would with an ordinary cheque or savings account. The account can also accommodate stop and debit orders and you can link it to a card to do your banking from an ATM.
* Money market unit trust
These facilities are not generally offered. You have to give notice to the unit trust company when you want to cash in your investment.
ACCESSIBILITY OF FUNDS
* Money market deposit account
Your money is available immediately. If you have the account linked to a bank card you can simply draw money from an ATM. Some banks limit the number of withdrawals you can make.
* Money market unit trust
You can access your money in a money market unit trust within 24 to 48 hours. There are no restrictions on how much or how often you can draw.
COSTS
* Money market deposit account
There is no annual management fee on money market deposit accounts. But you are charged for doing transactions such as withdrawing and depositing cash, transferring money between accounts, cheques, stop and debit orders and so on, if these facilities are offered. These charges may also be tiered depending on the balance in your account. At Standard Bank, for example, there is a set of charges for balances that drop below R5 000 and a set for
balances above R5 000.
* Money market unit trust
You can expect to pay a fee of 0.57 percent a year as an annual management fee. Most funds do not charge entry fees.
TIPS
* When choosing between a money market unit trust and a money market deposit account, you need to understand how each operates and choose the one that best suits your needs.
* Bear in mind that money market bank accounts may differ in the facilities that they offer.
* When comparing interest rates, make sure you compare apples with apples by taking costs into account on both sides.
DEFINITION
The money market is a financial market - a virtual trading place - where sums are money are lent and borrowed for the short term, which can be anything from one day to three years. Participants in the money market are the Reserve Bank, the commercial banks, big companies and large institutions such as Eskom and Transnet