Money Market funds are a common form of investment – but what are these facilities, and how do they work? We explain in full detail.
What is a Money Market account?
Money Market unit trusts – more commonly referred to as Money Market accounts – are a well-known investment vehicle that enables banking clients to invest smaller sums of money (with a typical opening investment requirement of around R20 000) where they will receive interest on their investment either monthly or annually.
These accounts generally return higher interest than regular savings accounts, and are sometimes further configured with a debit card facility - enabling investors to withdraw their holdings as cash. Money Market funds typically have a variable interest rate depending on local markets or exchange rates.
Money Market funds work as a result of Money Market instruments. A Money Market instrument enables an investor to issue a loan, and then receive their loan amount back at the end of its term with accumulated interest.
These instruments are typically bought in minimum sizes of a million Rand – meaning that few could afford to invest in such a fund. However, Money Market funds help ‘democratise’ this investment by allowing many investors to pool together their funds in a unit trust, to access the Money Market instrument in the first place.
Remind me, what are unit trusts?
A unit trust is essentially a portfolio investment that has been divided into units. Each day, those units are valued based on the assets held in the investment portfolio that they represent. Typically, this could refer to company shares (stock), property, bonds, or other assets that are either locally based or offshore.
To learn more about other common forms of investment, read our helpful guide here.
Is a Money Market account better than a savings account?
Money Market and savings accounts are in some ways similar. Both allow investors to safeguard their money over time, and provide a measure of access to those funds if they are required.
However, it’s important to note that savings accounts were designed to be accessed far more regularly, and come with fewer restrictions than Money Market accounts.
Savings accounts are generally best used for emergency funds or short-term growth, while a Money Market account is perhaps best suited for medium-term growth or to store funds over time.
Are Money Market accounts risky?
Money Market accounts are not inherently risky when managed well. It’s important to note that while characteristics of Money Market accounts may differ from bank to bank, there are some common drawbacks to this form of investment.
Firstly, Money Market accounts are generally not designed to facilitate transactions – meaning that should you urgently need to withdraw or transfer funds, you might need to transfer that balance into your current account to do so – potentially incurring transaction fees. Additionally, you might face restrictions on the number of transfers you can make in and out of the account.
Further, should your investment diminish below a set limit by your bank, you might find that you are charged fees to maintain and manage your account.
Lastly, most Money Market accounts require a minimum balance at all times – meaning that a portion of your investment might be ‘locked up’ and subsequently be unavailable should you need it.
If I have a Money Market account, should I move my money?
Absa recently informed its investors that it would soon wind up its Absa Money Market Fund, which first opened in 1997. This means that Absa clients who have invested in Money Market accounts are required to withdraw their funds into one of their bank accounts or another financial product.
While this may caution someone wishing to invest in Money Market funds or accounts, it’s worthwhile to note that banks reserve the right to alter their products at any time – however, more importantly, banking clients retain the right to withdraw or move their funds to a different financial product in the event the bank elects to close the investment.
Money Market accounts remain commonplace around the world and are still available from many other South African banks.
Consider that investments, such as Money Market accounts, are typically not designed as transactional accounts and are not intended to allow for the regular transfer of money. For this reason, electing to use a savings account, or another facility offered by your bank of choice, may be a better option.
Remember, there’s no better way to begin your investment journey than requesting the help of a licensed financial advisor – our guide can help you find the right one.