Is a money market fund right for you right now?

Earl van Zyl

Money market unit trusts have become popular as they appear to provide a safe, secure and reliable haven for your investments. During times with extreme volatility, you may be comforted knowing that your hard-earned rands will earn interest, as you put your money in and you get it back with a sliver more. But, no investment is risk free, so the question is – are money market funds right for you, now?

 “Many investors have flocked to the safe havens of money market and income funds due to South African equities delivering lean pickings over recent periods,” explains Earl van Zyl, head of product development at Allan Gray.

 Data by the Association for Savings and Investments South Africa (Asisa) released in February mirrors this sentiment, showing that that income funds posted real returns of 4% in 2018, and in the last three years, they have performed well with higher real returns than low-equity cautious funds.

 “But the reality is that investing 100% of your assets in rand-based money market funds may not be right for you, especially if you are investing for a long-term goal like retirement or for your child’s education,” cautions van Zyl, adding that money market funds are not entirely risk free.

 The pros of money market funds

Money market unit trusts are great for money in transition, or for a short-term savings or emergency plan. “They are an effective parking place for your money,” asserts van Zyl. “They allow you to store money that you will use in the near future, while getting some returns.”

 He adds that one of the benefits of money market funds is that your money is easy to access. They are more liquid than a fixed-deposit account with a bank, and don’t hit you with penalties that often apply when you request access to your money from a fixed deposit.

 A second benefit is that your eggs are not all in one basket. “A money market unit trust has investments across lots of issuers, whereas a deposit is only with a single bank,” states van Zyl. “Even though the bank does guarantee your deposit, banks sometimes fail, so although your risk is low, it is also concentrated.”

 The risks of investing in a money market fund

Van Zyl cautions that it is a misconception that money market funds are risk free. Investors in money market funds are exposed to a number of risks, which can result in real (and, in extreme situations, even nominal) capital losses. The three major risks include negative real interest rates, credit risk and liquidity risk.

 “Inflation is the primary reason why money markets are not suited to individuals with a long-term horizon,” says van Zyl. “Specifically, if the rate of inflation exceeds after-tax interest rates, then the spending power of your money will decline over time – this is called negative real interest rates.”

 He adds that a money market fund is unable to provide protection from the erosion of capital should policymakers choose to administer negative real interest rates. “If you had, for example, invested in a money market fund in Zimbabwe years ago, you wouldn’t have lost a single Zimbabwean dollar, but you would have lost the entire spending power or real value of your investment.”

 The second reason investors may not want to invest in a money market is credit risk.

 Money market funds invest in debt instruments. If the issuer of the debt instrument goes bankrupt, investors would likely bear a loss. Some funds, such as the Allan Gray Money Market Fund, try and buffer against this risk through diversification of issuers.

 “Lastly, extreme circumstances can heighten liquidity risk. If, for example, a money market fund receives a request for an extremely large withdrawal amounts from its investors, then it may force the fund to sell a type of financial instrument commonly used by money market funds called long-dated paper, which could incur a loss for the fund and its investors.”

 While the risks apply mostly to extreme circumstances, such as the financial crisis of 2008, van Zyl says it is important to be aware that money market funds, like all investments, are not entirely without risk.

 “If you are worried about the risks of the money market fund you are considering, ask your investment manager how the fund is positioned to deal with them, and what the plan is to protect investors’ capital.

 “As always when making a big investment decision regarding your money, consider speaking to an independent financial adviser who can help you make the right decision for your goals and risk appetite,” concludes van Zyl.



Latest


16 Feb 2021
Transition management services partnership announced

Standard Bank has signed a memorandum of understanding (MoU) with Chicago-headquartered financial services company Northern Trust, to partner on the…

Transition management services partnership announced

Standard Bank has signed a memorandum of understanding (MoU) with Chicago-headquartered financial services company Northern Trust, to partner on the delivery of transition management services across Southern Africa. Under the partnership, Standard Bank’s clients will gain access to Northern Trust’s full suite of transition management services. Transition Management is a…

16 Feb 2021
Tax free wealth creation with property funds

By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers, and Aimee Glisson, Director: Operations, Performance & Risk at…

Tax free wealth creation with property funds

By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers, and Aimee Glisson, Director: Operations, Performance & Risk at Metope Investment Managers The tax year, along with the deadline for an investor’s maximum R36 000 annual tax-free savings account contribution, comes to an end on the 28 February 2021. Investors…

16 Feb 2021
Why multi-manager investing is popular

Multi-management has been around for over two decades. This investment management approach is popular among many investors because it promises…

Why multi-manager investing is popular

Multi-management has been around for over two decades. This investment management approach is popular among many investors because it promises to deliver smoother, more consistent investment returns, despite cyclical turbulence of financial markets. Given last year’s drastic swings in financial markets and continued uncertainty on how the Covid pandemic will…

16 Feb 2021
Momentum Health Solutions unpacks COVID-19 vaccine roll-out plan

Momentum Health Solutions announced its COVID-19 vaccine roll-out strategy and how it intends to support both its members, as well…

Momentum Health Solutions unpacks COVID-19 vaccine roll-out plan

Momentum Health Solutions announced its COVID-19 vaccine roll-out strategy and how it intends to support both its members, as well as the uncovered population, in being vaccinated. As the COVID-19 virus continues to spread, a third wave is imminent, should the vaccination rollout not commence soon. Speaking at a recent…


Top stories


10 Sep 2020
How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key…

How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key that dubbed America “The land of the free”, which stuck, to the unforgettable Mel Gibson monologue where an army of painted Scots were willing to trade their lives for the…

13 Apr 2020
Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19…

Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.

13 Apr 2020
SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The…

SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March.

10 Apr 2020
When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved…

When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved to be most enterprising in acclimatising to challenges as they arise.


Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za