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The recent announcement by Absa that the 25-year-old Absa Money Market Fund will be closed came as a shock to pundits and investors alike.
Investors have until 6 July 2021 to move their funds to another account before the R80 billion fund, the third biggest unit trust fund in the country that represents nearly a fifth of all the money in South African money market funds, closes. Should investors choose not to move their funds, their investment will automatically be transferred to an Absa investment bank account, with the same account number, where their capital will be guaranteed by the bank. Transactional functionality on the account will remain the same as that of the Absa Money Market fund.
The reason given by the banking giant for the closing of the fund is that many investors have a misconception regarding the nature of the type of investment vehicle involved and believe that their capital and returns are guaranteed. As the Absa Money Market Fund is a unit trust fund and not a bank account, the capital invested in and returns received from the fund are not guaranteed.
In its disclosure document regarding the fund, Absa states that its primary performance objective is to obtain as high level of current income as is consistent with capital preservations and liquidity, adding that capital gains will be of an incidental nature. With money market funds there are no fixed yields – yields fluctuate according to the interest earned on the investments in the money market fund, which is bought at the discretion of the portfolio manager who manages the fund on behalf of investors.
Allan Gray says that money market unit trusts, commonly referred to as ‘money market funds’, have become a synonym for safe, secure and reliable investments. In simple terms the money market is where companies, governments and banks raise money by getting short-term loans from investors.
While you can choose to only invest in money market instruments issued by large institutions, this does not make them risk-free. Events like the collapse of African Bank, the global financial crisis of 2008, and the collapse following the outbreak of the COVID-19 pandemic underline the fact that no investment is without risk.
Allan Gray explains that money market unit trusts are a good tool to use for money in transition or for a short-term savings or emergency plan and that they are an effective ‘parking place’ for your money. They allow you to store money that you will use in the near future while getting some returns.
In some ways a money market fund is comparable in use to a fixed deposit account that you get from a bank, with some advantages:
While cash investments may not be best suited to counter the eroding effect of inflation on the value of your investment over the long term, they remain a secure and sound investment for short-term periods.
Apart from money market funds, there are several other cash investment types available to the investor:
Call accounts are offered through banks and allow investors instant access to their funds – withdrawals and deposits can be made at any time.
Money market accounts
Money market accounts are available for clients wanting market-related interest rates with liquidity and full access to funds, as well as full transactional functionality. Interest rates usually increase with higher balances in the account.
Income/Cash Plus funds
This cash investment vehicle is similar to money market funds; however, the portfolio managers of cash plus funds invest in a mixture of high-yield, fixed-income and money market securities.
As a short-term investment vehicle, cash is a good option for conservative and/or short-term investors and investors seeking diversification. Being able to park one’s money in an investment that yields attractive interest and offers capital security makes cash an attractive short-term investment choice.
It is advisable to consult your financial adviser before making any investment decisions to ensure that the optimal outcome, given your specific needs and circumstances, can be achieved.
The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.