Information on Money Market Funds

Information on Money Market Funds
Information on Money Market Funds

What are money market funds?

Money markets are named after wholesale markets where banks lend and borrow large sums of money. Participants in the money market are the Reserve Bank, the commercial banks, big companies and large institutions like Eskom and Transnet.

Unlike money invested with banks there is no “fixed” yield. Instead the yield moves up and down in accordance with the interest earned on the investments in the money market fund. The quoted yield on money market funds may fluctuate every working day. Investors in money market funds have to carry the possibility of a decrease in yields, although not in capital. Similarly, they also profit from an increase.

Money market fund managers specialise in placing client’s funds on the best terms possible with institutions that wish to borrow money for short periods. Because of this access to the wholesale market, money market funds usually offer a yield (a percentage return on your investment) higher than that offered by the retail banks to individual clients.

Incompass offer our clients access to money market and market linked savings helping you to obtain the best market interest rates.

What is the objective of money market funds?

The objective of money market funds is to offer investors a “safe haven” for cash during times of market uncertainty or during periods of transition.

The yield on these investments may outperform other types of investments for short periods, but is unlikely to do so over the long term. Investors tend to take refuge in money markets and income funds when the markets are very volatile, or use these funds as parking places, while they decide where to invest for the longer term.

When were they introduced in South Africa?

South African banks resisted the introduction of money market funds for many years, as they had a monopoly on the investment of short-term funds. Money market unit trusts were eventually introduced to South Africa in 1997.

What do the fund managers of money market funds invest in?

Money market funds invest in institutional money market instruments that are often not available to retail investors. Such instruments would include bank deposits, banker’s acceptance, wholesale call deposits, negotiable certificates of deposit, and other interest bearing instruments.

What are they not allowed to invest in?

Money market assets may not be invested for more than one year, whilst the average maturity period of the underlying assets may not exceed 90 days. This prevents money market fund managers from investing in the bond market, where the duration of investments is longer than 12 months.

What is the difference between investing in a money market fund and a deposit account with fluctuating interest rates with one of the banks?

Money Market unit trust funds “Market-linked” savings account*
Minimum balances Some unit trust money market funds require a minimum balance. Some market-linked deposit accounts have minimum balance requirements.Minimum balances are usually lower than those for money market unit trusts.
Term of investment Money market unit holders can generally withdraw funds without notice. Some market-linked accounts have minimum terms of investment.
Interest rates The average yield of unit trust money market fund is generally higher than deposit accounts.Over the last year unit trust yields have been approx 6 – 7%.Current money market yields are dropping as the interest rate outlook changes in line with inflation. Market-linked savings accounts are generally more conservative than money market funds.Yields over the last year have generally ranged between 6% and 10% depending on the amount invested.
Transparency Money market yields are available in the daily press. Market-linked savings account holders are sometimes not informed how the bank decides on the interest rates. Others have a set formula: they may for example, give account holders 60% of the prime interest rate.
Other facilities While many European unit trust money market funds offer extra services, South African funds generally do not. A few money market funds have ATM access.The fees associated with Unit trust money market funds are not designed to support a high level of administration. Market-linked savings accounts often offer other services.These may include ATM access, internet access, stop order and debit order facilities as well as transfer facilities and so on.
Fees Most unit trust money market funds have an annual fee of approximately 0.57%. This annual fee is worked into the yield.Fees of money market funds can depend on the access route used by investors. Absa, for example, charge their direct money market clients a 0.4% deposit fee, but this fee is waived for institutional clients. Savings accounts do not have annual fees.Account holders are generally levied for transactions fees applicable to the account.Transaction charges tend to be based on the balance in the account, the value of the transaction and the type of transaction.
Tiered rates All money market investors in a unit trust fund get one rate.The total income earned by the fund is divided by the number of units to get a “cents per unit” rate.This means that smaller investors i.e those investing thousands of Rands, get the same rate as those investing millions of Rands. The market-linked interest rates offered on deposit accounts tend to vary, offering different interest rates depending on the balance in the client’s account.The rates on amounts over R20 000 are generally more in line with rates on money.



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