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Make your money work hard for you

The costs for money market unit trusts tend to be lower than those for investment policies

SAVING your money under a mattress or in a safe is not advisable because financial services companies have developed different ways of making it work for you.

A bank account is a better option because you will earn interest, but you can now invest your money in the money market and access different financial instruments that will give you even higher interest.

Let's find out how the money market can help your money work harder.

What is a money market?

Just as you, an individual, may need to borrow or invest money, so banks and other financial institutions need to borrow and invest money.

The money market is where financial institutions go to lend and borrow large sums of money by issuing and trading what are known as financial instruments.

The money market consists of the retail market, in which individuals can participate, and the wholesale market, which, because of the large sums of money involved, is open only to banks and financial institutions.

Banks obtain some of the funds that they lend to their clients from the wholesale money market.

Individual investors can participate in the retail money market through financial instruments and securities such as call accounts, notice deposits and others.

Individuals who want to invest in the wholesale money market may do so indirectly via either general unit trusts, a money-market deposit account (usually offered by a bank), or a money market unit trust fund.

What are money market unit trusts?

Money market unit trusts are similar to other unit trust investments, where the money is pooled with that of other investors and is then invested in various assets by professional investment managers.

Unit trust funds may invest in shares, bonds, property and cash, or a combination of these assets.

However, in the case of money market unit trusts, the underlying investments are money market securities such as bankers' acceptances and treasury bills.

These are mainly short-term financial instruments used by banks, governments and parastatals to borrow money.

Because these securities are short-term, with terms of between three and 12 months, they are generally considered to be low risk investments.

In fact, they offer lower risk than equities, property and even most bonds.

What are the advantages of money market funds over cash-based bank alternatives?

Money market funds offer accessibility and higher interest rates. For example, on a R100000 investment placed with a bank, you can currently earn about 1,25percent on a call account, 3,8percent on a 32-day call account, and 7,07percent on a 12-month fixed deposit. Compare this to rates of about 7,36percent on a money market unit trust account.

Because a money market fund pools together your money with that of many other investors, this much larger sum is able to attract the higher interest rates in the wholesale money market.

Money market unit trusts also offer instant accessibility and transparency.

As an investor, you can sell units at any time, because money market funds are compelled by law to buy back units held by investors.

This is unlike bank fixed deposits, where investors are not allowed to access their funds during a certain period of the investment.

Investors also can keep track of their fund's performance by viewing their investment performance on line at any time.

The costs for money market unit trusts tend to be lower than those for investment policies. You can generally expect to pay two different sets of unit trusts costs: an initial, or upfront fee, and an annual fee.

However, most money market unit trusts do not charge initial fees. The annual fees tend to be up to 0,5percent.

So, should you need a place for safekeeping your savings that will earn attractive interest while allowing you instant access, money market funds could be an intelligent choice.

They also help make up part of a well-balanced investment portfolio, helping to lower overall risk and providing steady returns.

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