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At last you can pool your cash with... Medical aids need to wise up to the need... Don't let perks tax force you into the s... Crystal balls cloud over on direction of... UNIT TRUSTS: Investec Worldwid... Consumers dragged into credit overloa... Drowning in debt? Here's how to resurfac... I knew I was in deep when the valuator w... New kids on the block pack a punc... It's time to afford our investors some p... |
At last you can pool your cash with the big fish
The arrival of money market funds opens the door to far higher interest rates for investors, writes LEIGH ROBERTS
A NEW breed of unit trust fund which offers investors the opportunity to earn higher interest on their cash savings has been born. After repeated delays, the much-anticipated South African launch of money market funds finally took place on Friday. The funds, which are popular in countries like France and the US, are tailor-made for investors seeking a cash investment which earns high interest, has a low risk and can be withdrawn on demand. Money funds and general equity unit trust funds are entirely different animals: the former are more like bank call accounts. A money fund pays interest, not dividends, to its unitholders. It does not invest in equities, but in the financial instruments of the money market (bankers' acceptances, negotiable certificates of deposit and the like). The money market offers the highest short-term interest rates around, but is not normally available to individual investors because of the large sums required (R1-million plus). The pooling of smaller investors' cash into a money fund gives them the chance to enjoy the higher rates of the money market (approximately 15%, as against 10% generally offered by a bank call account on a R10 000 investment). Investors are also able to withdraw their money on demand. A money fund is generally acknowledged as a low-risk investment. The risk is low as the fund can invest only in short-term financial instruments (those that mature within one year). Another restriction is that the average maturity date of the fund's holdings must be 90 days. Investors should note that the risk lies in the fund manager having to sell an instrument at a capital loss (that is, at a discount), which is then deducted from the fund's income, thus reducing its payout. The price of each unit of a money fund is R1, and this is constant (unlike units in an equity fund which change daily). So if you invest R20 000, you own 20 000 units. What does change every day, however, is the yield of the fund - broadly, the interest rate you will earn if you invest in the fund on that day. The fund's yield is a weighted average of the interest income of the instruments it holds, after expenses and costs are deducted. The yield between funds differs because it depends on the instruments held and because each fund has different costs (like audit fees and investor charges). This yield will be quoted daily in newspapers. The table below compares the five money funds which were launched on Friday and reflects the fact that different funds are suited to different investors. The Sanlam fund is the only one which is directly aimed at the mass market: its minimum lump sum deposit is R2 000. Absa offers a savings option of R1 000 a month, but the other funds are largely aimed at individuals who have R20 000 and more to invest. The charges the investor pays for the privilege of investing in a money fund vary. Sanlam charges an initial fee of 1.5% to 0.6%, depending on the amount invested. The Absa fund is the only other one which charges an initial fee - 0.35% (negotiable for large deposits). All funds charge investors an annual service fee. The fund's yield is stated net of these charges. All funds pay out income to investors at the end of each month (but interest is calculated on a daily basis). Investors have the option of re-investing the income. Only the Absa fund offers investors the convenience of ATM banking. Money funds have many uses to investors. They're an ideal place for short-term investments: you earn high interest and the money is on call. Longer-term investors can also consider them as their current yields are comparable to the best fixed deposit rates. However, the money market investment accounts offered by Nedbank, First National, Standard Bank, NBS and Syfrets could offer investors even higher returns. These new products pre-empted the money funds by also offering money market rates, at no extra charge. But most have high entry levels (usually R20 000). Investors with less than R20 000 to invest will score higher interest by opting for the Sanlam money fund.
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