Business

Money market funds vs savings accounts

BY SHAMILLE SCOTT Business reporter scotts@jamaicaobserver.com

Sunday, February 17, 2013    

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IF you have a large sum of money that you don't urgently need, a money market fund may work for you.

Money market funds are generally low risk, low return, with a primary objective to provide investors with a safe place to invest easily accessible cash-equivalent assets.

What about a savings account? While it's liquid and you can get your cash quite quickly, the returns aren't as great as a money market fund, said Sean Taylor, senior research analyst at Barita Investments.

In fact, Taylor describes the fund as always working, so your money is being put to use.

A money market fund rate surpasses any savings accounts, he said. It works like a unit trust or mutual fund in the sense that your money is pooled along with money from other investors.

The fund will give you access to government of Jamaica and Bank of Jamaica instruments.

Note that it's not a money market account, which is a type of savings account that requires you to maintain a certain balance, which is usually a large sum of money. Failing which, you incur penalties.

With as little as $2,000 you could buy 100 units in that investment fund at Barita, Taylor said.

Other money market funds are available at Jamaica Money Market Fund, Sagicor Life Jamaica and Scotia Asset Management Limited.

But how do you know which fund to choose?

Look at the strategies employed by the fund manager.

"Find out who will have the time to monitor your investment," Taylor said.

Importantly, understand which investment policies will complement your risk profile.

The fund manager's track record and history is also important, he added.

"Though history doesn't predict the future, you can tell who is consistent."

One of the main reasons people put their money in banks is because of security -- no mattress could really match a bank's security system. But, institutions can fail. While the bank insures your savings, you won't get all of your initial capital.

All money market funds have a trustees who holds the funds, and in the unlikely event that they fail, you get back 100 per cent.

"We have to match your investments," noted Taylor.

Then there are fees, which could catch you off guard with a savings account, he added.

"You can encounter depository fees, dormancy fees, withdrawal fees," he said.

With a money market fund, on the other hand, you have an open-ended fee and there are no withdrawal costs.

Admittedly, a bank account has its benefits.

May individuals receive their salary and pay their expenses as well as give access to debit through that media.

"It's good for emergency funds, and movement of capital," Taylor acknowledged.

Though with the money market fund you are encouraged to keep your cash untouched for at least 90 days, you can get it if you want.

"You have the right to encash anytime, in three days you can get your money," Taylor said. But, "you won't get the interest if you move it before the 90 days.

"As an investor, you can leave your money until thy kingdom comes and you will be guaranteed returns," Taylor said.

The economy has been altered in light of the National Debt Exchange (NDX). With that, the Government is asking holders of public debt to take up to a five-percentage point reduction in interest rates.

NDX aims to lower the annual finance costs by $17 billion by shaving an average of two percentage points off interest rates on $860 billion of government's domestic debt.

Possibly with this, banks will have to lower their interest rates, Taylor said.

"And money market funds will feel it too," he said. "NDX will affect government bonds interest payments and effective yield will go down."

He added that it wouldn't affect the global bonds that Barita has. "That diversification will help with the NDX situation."

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