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.


Fees
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.

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Maya Fisher French
Guest Author

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