M Is For Money Market Funds

Money market funds are low risk, low-return funds

Money market funds invest in high-quality, short-term debt securities and other monetary instruments with maturities of 12 months or less. These funds are widely regarded as being as safe as bank deposits but they aim to consistently outperform call and fixed deposits.

They mostly achieve higher rates of return than bank deposits

Despite the stringent credit and liquidity limits within which they operate, money market funds do achieve higher rates of return than putting your money in the bank.

They offer investors relatively high levels of income plus capital preservation

The interest they earn enables them to provide investors with a regular monthly income that is higher than that offered by banks. Thanks to the high quality of the debt in which these funds invest, investors also enjoy optimal capital protection.

They aim never to lose money

In striving to maintain a stable net asset value of R1 per unit, money market funds manage to eliminate most of the fluctuations to which other asset classes, like equities and bonds, are subject.

In other words, they help to create a safe haven from market volatility.

They remain liquid at all times

Investors are able to access their money on demand thanks to the high liquidity levels offered by all unit trust funds.

They are not generally advised for long-term investment purposes

It is advisable not to use these funds as a long-term investment option because their returns, although higher than those on bank deposits, are relatively low compared to other instruments and thus don’t outpace inflation as much and in some market conditions may fall behind inflation.

Comparatively low returns are the payback for being invested in a relatively risk-free environment. Unfortunately money market funds may not generate a real long-term return (their returns may be lower than inflation), which is why they are not appropriate long-term investment vehicles.

They provide investors with excellent diversification options

Money market funds provide a very attractive alternative to current and savings accounts and can also be used to diversify away from equity investments or against single company or bank risk as a temporary shelter for investment capital.

But in SA, these funds are exposed to higher concentration risk
Compared to other international and national markets, the level of concentration risk in the South African money market sector is higher than average because there are a relatively limited number of eligible issuers of debt securities with suitably high credit ratings.