Saving for short term needs?

Apr 15, 2021 | General Financial Planning News

Portia Vlotman, Associate Director and Money Market Manager, tells us about the differences between Money Market Savings Accounts and Money Market Funds.

The most popular short-term savings options offered are Money Market Savings Accounts or Money Market Mutual Fund offerings.

A Money Market Savings Account is different from a Money Market Mutual Fund: Money Market Mutual Funds are offered by investment companies and certain banks, and Money Market Savings Accounts are offered by banks or investment houses such as Personal Trust.

Money Market Funds and Income Funds:

Money Market Funds and Income Funds are mutual funds that invest in high-quality, short-term debt instruments, cash, and cash equivalents. Money Market Funds refer to a section of the financial market where financial instruments and short-term maturities are traded. Though not quite as safe as cash, Money Market Funds are considered extremely low-risk.

  • A Money Market Fund generates income (taxable or tax-free, depending on the portfolio make-up), but little capital appreciation
  • Money Market Funds should be used as a place to park money temporarily before investing elsewhere and are not suitable as long-term investments
  • Both interest and dividends are earned
  • There are certain risks that investors should be aware of, one of these being defaults on securities such as commercial paper.

The fundamental difference between a Money Market Fund and an Income Fund would be liquidity, which will tie in with returns.  The capital on both is not 100% guaranteed as is the case with the Money Market Savings option.  The Income Fund would carry a larger risk due to the instruments invested in the fund i.e. government bonds, corporate bonds, property trusts and the like, which allows for capital appreciation but also capital loss at times.

Money Market Savings Accounts:

These are deposit vehicles very similar to a regular savings account. Money deposited in a Money Market Savings Account earns interest and is very easily accessible.  As with  a savings account these funds are immediately available and sometimes limited to a few withdrawals per month.

Money Market Savings Accounts have requirements such as the following:

  • Opening balances are necessary to justify a higher interest rate
  • Minimum balances must be maintained
  • Interest is earned (there are no dividends)

In most countries, banks are regulated by the national government or central banks.

We at Personal Trust invest with the major banks in South Africa.  We took this decision after the demise of Saambou Bank in 2002, when the South African Reserve Bank (SARB) did not come to the aid of the failing bank.

Banks are rated as either F1 or F2, this being the short-term ratings by rating agencies such as Fitch. Saambou was in the category of F2, which led us to take the decision to only deal with the bigger F1 institutions. 

Our view is that should any of these F1 banks run into trouble, the SARB would offer a bail-out option, as it will cause a huge financial crisis should any of these bigger banks be allowed to fail. Therefore, we believe it is imperative to check which banks you are investing with and not only be swayed by the interest rate on offer.

The banks Personal Trust would typically invest funds with are as follows: Standard Bank, First Rand Group – FNB/RMB, ABSA, Nedbank, Investec and Sanlam.

For further information, please contact your Trust Officer (if you have an existing portfolio with Personal Trust). Alternatively, contact Portia Vlotman directly should you wish to discuss the interest rates we offer on Money Market Savings Accounts or Fixed Deposits.