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 South African Reserve Bank, 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 clients’ 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.
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. Investors also tend to 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 withdraw funds without notice.||Some market-linked accounts have minimum terms of investment.|
|Interest rates||The average yield of unit trust money market funds is generally higher than deposit accounts. Over the last year unit trust yields have been over 12%. 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. This discrepancy is usually justified (by the banks) with the explanation that savings accounts offer additional services. There is generally a time lag between the current money market rates and rates offered to market-linked account holders.
This time lag can either work in the account holder’s favour or against it.
|Transparency||Money market yields are available in the daily press.||Market-linked savings account holders are sometimes not informed on 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 market accounts.|
Information on Cash Saver
What is the cash saver?
Cash saver offers a real alternative to money market funds, supplying instant access capabilities and higher interest rates, but with the added ease of personal banking facilities. In essence it is a bank account with high interest rates.
Who is the provider of Cash Saver?
Cash Saver is provided to selected intermediaries by Investec Private Bank. Our sister company Incompass is in this case the intermediary.
How does it work?
Incompass is able to open up your client account for you (please note this can be done when you are abroad).
The service is similar to private banking whereby you simply instruct Incompass (who provide you with a dedicated advisor) for withdrawals and statements. This means total control and ease of use for the client who is able to instruct Incompass to, for example, pay bills.
What interest rates do I get?
A number of options are available to you, providing you with interest rates linked to prime, money market rates or fixed term deposits – all on a very competitive basis.
- Superior private bank service experience.
- World class security and authorisation process.
- Competitive interest rates.