The role of a money market fund in your overall portfolio
Cash deposits at banks increased substantially during 2020 as clients built up cash reserves, despite low interest rates. The reasons for this are two-fold – those who held on to their jobs spent less on petrol and entertainment costs. In addition, the reality of the pandemic drove home the need for some sort of cash reserve or emergency fund.
However, money market funds offer investors higher interest rates and more diversity while still providing liquidity.
Start with the purpose in mind
A vehicle for a shorter-term investment should offer the investor the following:
It should maintain the value of the investment and offer a low-risk investment option with low levels of volatility. (This is assuming the investor has exposure to growth assets in other longer-term investments to grow their capital).
It should be liquid, i.e. provide ready access to the funds.
It should generate a return above inflation.
Consider your risk appetite and profile
If you have a higher risk tolerance (and capacity) and are looking to grow your capital, then a money market fund may not be the best vehicle for you. If you have a longer-term investment horizon, then again, you may want to consider other investment vehicles.
Money market funds are ideal for short-term savings, and their liquid nature makes them ideal as an emergency fund. Having ready access to funds is pivotal to your overall financial plan as this will prevent you from having to take on debt when an emergency arises.
Money market funds are also a good “parking” place for funds
In times of higher volatility in the markets, investors may not want to place all their available cash into an equity or a balanced fund. They may want to consider placing their cash in the less volatile vehicle (money market fund) and gradually phase their money into the market. This is a very different strategy from attempting to time the market. This approach seeks to prevent a large loss should the market experience a decline immediately after an investor has bought into the market.
Access to your funds
Funds in a money market are easier to access than for example, a bank fixed deposit. You’re not locked-in to any investment period, and there are no penalties for accessing your funds in the money market. Because the money market is a unit trust fund, it offers more diversification and therefore protection as you don’t have “all your eggs in one basket” as with a cash account. A money market unit trust invests across many banks whereas a fixed deposit is with one bank only.
Over the past year, an over-supply in short-term Government Treasury Bills saw their interest rate rise to 6.4%, which was higher than the interest rate on a cash account. This provided an opportunity for money market funds and those that had an overweight position in Treasury Bills over the last year have done well. Those that stayed in fixed-interest instruments would have struggled because of the drop in the repo rate, which declined by 300 basis points last year.
Historically, money market funds have tended to outperform regular cash accounts. Even in times when they don’t outperform, they still offer diversification benefits and ready access to cash without penalties.
Please consult with a financial adviser before you take any action regarding your savings and investments.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers
Wrap funds are managed by Glacier Financial Solutions (Pty) Ltd., a Licenced Discretionary Financial Services Provider, FSP 770, trading as Glacier Invest
Glacier Management Company (RF) (Pty) Ltd is a registered and approved Manager in Collective Investment Schemes
The Fixed Return Investments by Sanlam are sinking fund policies underwritten by Sanlam Life Insurance Limited.