Should I Invest In A Money Market Unit Trust?

Money market unit trusts (also referred to as ‘money market funds’) are safe, secure investments. It should be understood that you won’t find an entirely risk-free investment. A good comprehension of how money market unit trusts work can assist you to use them appropriately in your portfolio.

So, what exactly is the money market? In a nutshell, the money market is where institutions such as governments, companies, and banks raise money by getting short-term loans from investors. All the transactions are conducted electronically via a network of sellers and buyers. So, the money market doesn’t exist in a physical or central location.

What is a money market instrument?

A money market instrument allows an investor to receive their principal loan, plus accumulated interest when the loan term comes to an end. Here’s an example to explain it more clearly.

A financial institution such as a bank requires R200 million to cover operating costs for the next 12 months. They can issue money market instruments to raise this money, which numerous investors buy.

This money market instrument offers 4.5% interest (known as the yield) with a maturity period of 12 months. Higher interest rates would likely need to be offered to compensate for investment risk if the instruments require more extended maturity periods.

Interest accumulates until the day the instrument matures. On maturity, the investor will receive the total interest amount plus the original capital investment.

Should the investor sell that instrument before maturity, the new holder can pick up from where the old one left off.

This may sound like a bond; the difference is the time horizon. Money market instruments usually have terms of up to 12 months.

When should I invest in a money market unit trust?

It’s worth investing in money market unit trusts for short-term savings plans such as an emergency fund. It’s a secure space to store your funds, earn returns and access it when/if required.

It could be said a money market fund is, from a practical perspective, comparable to a fixed deposit account that you get from a bank, with some advantages:

1. You can cash out whenever you want

With most fixed deposits, you can’t access the funds for a certain period of time without paying penalties. In contrast, a money market unit trust is more flexible – you can access the capital whenever required.

2. Investment diversification

A money market unit trust has investments across many financial issuers, while a fixed deposit is only with a single bank. They state your deposit will be guaranteed, but this isn’t always the case with banks, so although it’s a low-risk investment, it’s also too concentrated.

Understand the risks

So, it can be deduced that money market unit trusts are a convenient, flexible and low-risk investment when used for the correct purpose. Should you need more information, it’s a good idea to speak with an independent financial adviser who can answer any questions you may have about this type of investment.

You may also like: Private Equity as an Investment Choice

Image source: Shutterstock.com