When should you use a money market fund?

Money market unit trust funds have become synonymous with safe, secure and reliable investments, but under what circumstances should you use them?

“Understanding how money market unit trusts work can help you to use them effectively in your portfolio,” says Bekithemba Mafulela, business development manager at Allan Gray.

In simple ter ms, the money market is where companies, governments and banks raise money by getting short-term loans from investors. In practical terms, all transactions are done electronically through a network of buyers and sellers, sometimes in auctions run by the banks, and there is no central or physical location where the money market exists.

Money market unit trusts are a good tool to use for money in transition or for short-term savings.

“They are an effective ‘parking place’ for your money,” Mafulela says. “They allow you to store money that you will use in the near future, while getting some returns.”

He says a money market fund is similar to a fixed deposit account at a bank, with some advantages.

First, you can cash out whenever you want. “With most fixed deposit accounts, you are locked in for a specified period where you may not withdraw your money without penalties,” he says. “A money market unit trust is more liquid, which is something you should consider when comparing its returns to a fixed deposit from a bank.”

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,” Mafulela says. “Even though banks guarantee your deposit, they do sometimes fail. The risk is low, but it is also concentrated.”

The downside of money market investments is inflation, Mafulela says. The retur ns of a money market unit trust often do not keep up with inflation over the long term.

“If inflation exceeds the yield, you may not lose a cent from the balance you see on your investment statement, but each cent will buy less, the longer you keep your money in the unit trust,” he says.

“Put differently, money market unit trusts are usually not appropriate for long-term investing, such as saving for retirement or your child’s education.”

At the end of March, money market unit trust funds were giving yields of 7.04% to 8.23%, depending on the fund. The lowest minimum investment in such a fund is a lump sum of R2 000 or R200 a month.