There are not one but three ways in which you can invest your spare cash. The most obvious is a bank account. But for individuals who want a higher rate of return there is the wholesale money market, which may be accessed either indirectly via unit trusts or directly via a money market deposit account offered by a bank.
The underlying question is what you ultimately want the cash for – either investment purposes, or the working capital in your business.
A conservative investment
The major risk associated with money market accounts is so critical it needs to be well understood upfront. Candice Payne, head of retail at Sanlam, explains that the single greatest delusion when it comes to the money market is that your capital is safe.
“It is safe, of course – if you invest R100 you will certainly get your R100 back together with the relevant interest rate. But the real risk with money market accounts is not the threat to your capital, but that over time your capital fails to outperform the inflation rate, in which case you will be losing capital in real terms.” If this is the case, she says, the investor needs to look at taking on additional risk in his portfolio, because the reality is that money market accounts are meant for the conservative investor. “This is of even greater relevance at the moment because of the low interest rate environment we’re in,” says Payne.
So who are money market accounts for?
According to Lisa Macleod, portfolio manager: fixed income at Investec
Asset Managers, it is for those who have already made the decision to opt for a conservative or liquid portfolio and simply want a better return. It has particular relevance to small business owners as it is a vehicle into which they can place their capital while it isn’t working.
You can place your money in a call account with a bank, but depending on the amount, the deposit may earn up to 4% less than on the money market. With banks, the higher the deposit the higher the rate of interest. The higher rates only kick in at about R20 000.
“You can also lock it away in a fixed deposit but you lose the liquidity (it could be tied up for as long as 30 days), whereas you have 24-hour liquidity on the money market,” says Macleod. The improved rate on offer from the money market comes from the bulking of capital: Investec alone has R32 billion in assets under management in its money market fund, which gives it negotiating power with borrowers.
How money market accounts work
The two types of money market accounts have different value propositions, though in reality they are not much different. You can buy a unit with a money market unit trust, in which case you get all the advantages of bulking, the diversification that comes from being invested across several funds, the benefits of the fund managers’ intellectual capital and expertise, and the security that comes with regulation.
After many years of resistance from the banking sector, which had a monopoly over the investment of short-term funds, money market unit trust funds were first introduced in South Africa in 1998. A money market unit trust fund is similar to other unit trust investments. Your money is pooled with that of other investors, and is then invested in various assets by professional investment managers.
Unit trust funds may invest in shares, bonds, property and cash or a combination of these assets. In the case of a money market unit trust, the underlying investments are money market securities. Money market fund managers specialise in placing your money, on the best terms possible, with institutions that wish to borrow money for short periods, usually less than one year.
The average duration of the portfolio may not exceed 90 days. (This is the average time within which all the instruments held by the portfolio must repay their loans.) Money market unit trusts are classified in the fixed interest category. You can also invest in the money market directly with a bank, which will offer similar advantages but without the benefits of regulation (they are not unit trusts) or diversification cross several banks.
Are banks riskier?
It may seem unlikely that any major South African bank would go under, yet it was the banks in the US and Europe that suffered the most in the 2007
financial crisis. Macleod says the rate offered between unit trusts and banks varies slightly from time to time, depending on whether a bank is aggressively trying to raise cash or not. Most banks offer money market accounts. It is advisable to shop around because the interest rates and the minimum investment amounts vary between the banks. Both options have minimum capital amounts that vary from one to another. Investec’s is R50 000, though the average is R25 000 – R50 000.
Investec, as an asset manager and a bank, offers both options: the unit trust, as well as its Investec Top 5 Money Market Fund. Investec’s rate at the moment is 7,37%, while the average return throughout 2009 for the money market was 9,07% compared to 8,36% on call account. “Entrepreneurs can use a money market account almost as a current account, but with a better rate of return. But it has to be stable cash due to the 24-hour withdrawal time – you cannot write cheques on the account or withdraw immediately, and they would need to identify their daily working capital needs and decide which capital is a little more stable and can be put into a money market account,” says Macleod.