Using money markets to achieve your savings goals

If you’re looking for a short-term holding bay for your funds, it’s likely that you’re considering money markets as an option. But it’s important to know the difference between money market accounts which are banking products and money market funds which are investment products run by investment managers. Money market vehicles can play an important role in your portfolio depending on your specific needs, so let’s explore what to look out for when choosing the most appropriate vehicle.

Being a banking product, a money market account is a form of bank account which offered by most banks. These types of accounts fall under the regulatory auspices of the Banks Act and are defined by the Financial Services Conduct Authority (FSCA) as ‘short-term deposits’. Similar in nature to a cheque or savings account, the interest rates offered by money market account are generally higher than normal transactional accounts, with these rates being advertised upfront by each bank. As such, when choosing a money market account, consumers can make like-for-like interest rate comparisons and then choose accordingly, although keep in mind that this is not the only factor that should be considered.

On the other hand, a money market fund is not a banking product but rather a unit trust investment which is managed by an investment manager. As such, money market funds are regulated by the Investment Collective Schemes Control Act and are defined by the FSCA as ‘collective investments’. In a unit trust, investors’ money is pooled together and invested in an array of underlying assets, depending on the investment manager’s mandate, which in the case of money market funds generally includes lower-risk assets such as promissory notes, commercial papers, treasury bills, or negotiable certificates of deposit.

When choosing between a money market fund or account, it is important to understand the risks associated with each type of vehicle. In a money market account, you will always know how much interest your funds will earn each month as these rates are available upfront. As a result, you will always know the value of the funds in your account on any given business day, with the added comfort that your capital is guaranteed. That said, there are inherent risks involved when placing all your funds in a single banking institution as it is not unheard of for banks to collapse, such as in the case of Saambou and African Bank. However, such occurrences are not common, generally speaking, money held in a reputable bank is safe. The low-risk nature of a money market account can provide comfort that one’s capital is not only protected but also earning slightly higher interest than if it was left in one’s savings or cheque account.

Being an investment, money market funds face a completely different set of risks which should be considered. There is an expectation that money market funds are expected to provide the investor with guaranteed returns and capital protection, but this isn’t always the case. Not all money markets are the same, and it is important to understand the mandate as well as the asset allocation of the fund you are investing in. While some funds will have their entire allocation in South African cash and income instruments, you could also find a fund that has a blend of cash, income and bonds both local and offshore with each asset class having its own risks, including currency risk for any offshore allocation. When investing in a money market fund that is comprised of just cash and income instruments, it is highly unlikely that you will lose your capital, although it can occur, such as where there is a default from one of the issuers your asset manager has invested in. Where allocations are made to bonds or any asset class offshore, it is advisable to discuss with your financial advisor to understand the risks associated with these asset classes

Understanding the purpose for which you intend to use your funds is a critical part of the decision-making process, with the accessibility of funds being an important factor. As money market accounts generally provide account holders with 24/7 accessibility – including ATM accessibility and the ability to transact online – these vehicles are well-suited to house emergency cash, the nature of which is generally urgent and unforeseeable. On the other hand, to access funds held in a money market fund, the investor will need to issue the investment administrator with a withdrawal instruction, following which it could take anywhere between one and five business days to access the money.

When it comes to minimum deposits and additional deposits, it is best to do your research online as these can differ vastly from provider to provider. Providers of money market accounts generally have minimum deposit requirements of around R10 000 to R20 000, while the minimum deposits of money market funds tend to be higher. Again, you will need to do you research as these deposits can range from R50 000 to R200 000, including minimum limits on additional deposits. While money market accounts generally charge a pre-determined fee per transaction, money market funds tend to charge investors an annual management fee which is indicated upfront.

With the above in mind, when selecting between a money market account or fund, consider the following questions:

• How much money do you have to put away?
• What do you intend using the money for?
• When is the earliest you anticipate needing the money?
• How quickly would you need to be able to access the money?
• Will you be adding additional funds to your savings?
• How would you feel emotionally if your capital lost value in the short-term?

For ease of reference, we have summarised the key features of each type of vehicle in the table below.

Have a wonderful day.

Sue