investors
Mail & Guardian Reporter
Money-market funds, which will be launched this week, may sound like just another banking mouthful.
But they probably represent some of the best news for consumers. Popular overseas, the funds combine some of the best elements of a current account and unit trusts.
And they could be good for business. “They are a positive factor for the economy because it’s another area where companies can borrow money,” says Colin Woodin, the executive director of the Association of Unit Trusts.
They’re also set to give banks a run for their money by offering better interest rates.
* What are money market funds?
They are not at all as complicated as they sound.
The funds are a type of unit trust. But unit trusts invest on the stock market, whereas the fund managers of money-market funds will invest in a range off money- market instruments: listed and unlisted companies, government bonds, government institutions like the Land Bank, as well as bank deposits. Funds are invested only in assets which have a maturity date of one year or less.
* What’s in it for consumers?
Because the investments are short-term, you can see benefits a lot sooner than with unit trusts, for example.
You can withdraw your money should you need to; it’ll probably take a day initially. So, it’s almost like operating a cheque account, but you will earn interest rates well in excess of those paid on current accounts.
* Is that all?
The biggest boon of money-market funds is that they combine the funds of many small investors to give them big-bucks clout. By pooling money, they can secure a better rate of interest, perhaps even the wholesale deposit rate usually reserved for really wealthy investors.
Woodin says these funds are also different because the unit price stays constant.
The funds work on earning interest and are not stock exchange-linked as other unit trusts are.
* What do they cost?
If you don’t have a substantial amount of disposable income, this one’s not for you … yet. Investec’s fund launched this week requires a deposit of R20 000.
Sanlam’s Money Market Fund requires a deposit of R2 000 and minimum payments of R200 a month. You must also keep a balance of R2 000 in your account.
Money-market funds are going to compete head-on with banks. So, costs will be kept low. These will probably be fixed at less than 1% a year. Most banks charge per transaction.
* What’s the bad news?
Money-market funds have been successful in the US and other countries because they offer greater tax breaks and offer all the convenience of a cheque account.
Not in South Africa unfortunately.
Tighter regulations mean that only the first R2 000 interest you earn will be tax- free.
The Financial Services Board has also dictated that you cannot write cheques out of the fund though local businesses are likely to lobby for changes.
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