Unit trusts vs bank accounts: What’s the difference?

Roderick asks: What’s the difference between a money market and a unit-trust account?

Maya replies: A money-market account offered by a bank is simply a bank account with a more aggressive interest rate. It’s an investment account rather than a transactional account. There are usually higher minimum balances required.

A money-market unit trust is invested across a range of different interest-bearing investments with various financial institutions and these are managed by a fund manager.

A bank account has the advantage of being able to transact easily, moving your funds between your investment account and transaction account, while unit trusts can provide higher yields.

Unit trust risk
Any yield above a bank rate suggests that additional risk has been taken. Sometimes, fund managers invest in higher risk investments in order to boost the return to investors (higher risk, higher return). When selecting a money-market fund you need to do your homework and find out what the asset manager is allowed to invest in. If the yield is higher than its competitors, then there is even more reason to ask questions. It may be that the fund manager has managed the duration of the financial instruments effectively, or they may have invested in lower investment-grade instruments. Ask what rating the fund has been given by CA ratings (a division of Moody’s). AAA is the highest rating a fund can receive.

Money-market unit trusts do charge management fees and you need to first confirm whether the interest rate quoted is before or after the management fees. Absa’s money-market fund is a case in point. Many people think it a normal banking product when it is in fact a unit trust and charges a deposit fee. One needs to be invested for a year in order to offset the deposit fee against the higher yield.

Match the investment with your time horizon
The advantage of a money-market account, either with your bank or a unit-trust company, is that the money is available within 24 hours, yet you receive a higher interest rate than a normal bank account.

However, if you do not need that level of flexibility and could invest for a fixed period of time, you will find the rates offered by a fixed deposit can be higher.

If you are looking for a good return on your cash, it is definitely worth shopping around. Banks have varying rates depending on their demand for deposits at the time.

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Maya Fisher French
Guest Author

Related stories

School closures come at a cost

The latest, unscientific decision to close schools again won’t help poor students. Strategies must be identified to help learners stay in school

As opposition mounts, Zimbabwe’s president lashes out

Emmerson Mnangagwa has accused ‘dark forces’ of destabilising the country

Big retailers need to step up to the plate

To stave off a multi-generational malnutrition crisis, the food industry must work with government to provide highly nutritious foods at cost during the pandemic

Crime stats mark a bitter start to Women’s Month

We must celebrate women’s achievements this month while agitating for structural change, argues Luke Waltham

South Africa prioritises fossil fuels over clean energy in post-Covid-19 recovery packages

The country is among the G20 countries who have invested in electricity produced from coal, oil and gas at the cost of addressing climate change

Challenges and opportunities for telemedicine in Africa

Telemedicine in Africa is currently limited by the availability of basic infrastructure, but, considering the lack of doctors in rural areas, it is a vital component in addressing the continent’s healthcare needs

New education policy on gender violence released

Universities and other higher education institutions have to develop ways of preventing or dealing with rape and other damaging behaviour

Cambridge Food Jozini: Pandemic or not, the price-gouging continues

The Competition Commission has fined Cambridge Food Jozini for hiking the price of its maize meal during April

Sekhukhune’s five-year battle for water back in court

The residents of five villages are calling for the district municipal manager to be arrested

Vaccine trial results due in December

If successful, it will then have to be manufactured and distributed

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday