Saving for a short-term goal using money market unit trusts

Posted on | September 3, 2009 | No Comments

Do you want to save up a for a short-term goal? Maybe it’s for a deposit on a property you’d like to buy in the future or perhaps an overseas holiday. Do you have a certain amount of money which you could put away every month and you’re free from short-term debt, like on your credit card? Maybe you already have some cash saved, which you’d like to use to kick start your short-term investment. But what’s your best option for saving for a short-term goal in the current South African market?

Maybe you're saving for a deposit on a property.

I asked Gregg Sneddon of the Cape Town based financial planning company The Financial Coach a few questions. If you’re planning to save for a short-term goal, Gregg advises the following:

‘There really is only one option here, which not enough people know about, and that is the money market unit trust account. No capital risk, access to your funds at 48 hours notice and no fees to get in or out. Plus, it also offers the best short- term interest rates.’

But what exactly is a money market unit trust account? Basically, it’s a low-risk fund that invests in markets where banks lend and borrow large amounts of money, hence the term money market. Commercial banks, the Reserve Bank and large companies and institutions participate in these wholesale markets. Money market funds focus on investing in securities, for example bank deposits and wholesale call deposits with a maturity of less than 12 months.

The bottom line is that you’ll get a higher return on investment, as your money is being invested by a fund manager in a market, which you wouldn’t normally have access to. Gregg says you’re looking at a return of around 7 to 7.5% per annum in the current market. That’s pretty much on par with fixed deposit investments, which you can see in the fixed deposit interest table from www.thinkmoney.co.za (http://www NULL.thinkmoney NULL.co NULL.za) below. The difference is that with a money market unit trust account your money isn’t tied up and unavailable to you for a long period of time.

Fixed Deposit Interest Rates from thinkmoney.co.za

But don’t confuse a money market unit trust account with a money market bank account. The money you invest in a bank account is only invested in that bank’s securities. While in a unit trust account, your investment is diversified across different banks.

You’ll find money market unit trusts are available from most financial institutions and minimum investment amounts will differ from company to company. After a bit of research, I found that the lowest buying option is offered by Metropolitan Collective Investments (http://www NULL.metropolitan NULL.co NULL.za/unittrusts/default NULL.asp). You can either invest a lump sum of R10 000 or choose a monthly investment where the minimum is only R200. Once the account is open, you can invest any additional amounts as and when you like. A good incentive if you receive a bonus one month – it’s a good place to save that additional, available income.

While we may be saving for the short term, the seasoned investors out there invest in money market unit trust funds during times of market volatility and when they need a place to hold money while deciding on future long-term investments. That way, they’re still earning good interest on their money. In other words, learn from the professionals and use their knowledge for your personal gain.

How about investing in unit trusts for a long term? Gregg had the following to say:

‘I think they are the ultimate investment vehicles – low minimum amounts, low or no initial fees, access to some brilliant fund managers, no contract (unlike endowments), access to the money if you need it, legislative protection… You can’t beat them. For R500 per month, you can buy into a fund of the Top 20 shares on the JSE or even into shares on the global markets. If you have the time, such as 10 years, then pick a general equity unit trust fund and put your money there, either on a monthly basis via debit order and/or ad-hoc lump sums.’

Whether your goal is short term or long–term, it’s easy to invest in unit trusts. I personally invest with Old Mutual (http://www NULL.oldmutual NULL.co NULL.za) and have been pleased with the results. So look around, there are plenty of options available.

Gregg adds:

‘If you don’t have time, don’t take capital risk! You are an investor, not a gambler – the share market is not for the short term. So stick to cash and more specifically, to money market unit trust accounts.’

It’s good to know that you don’t have to settle for a low-interest bearing savings account. You can make your money work for you even when investing in the short term, plus it’s low risk. Ask around and see what’s available. You may be able to reach your short-term goal a little quicker than you had initially thought.

Gregg’s company The Financial Coach can assist you with planning your finances, investments, tax, education and retirement. For more information visit www.thefinancialcoach.co.za (http://www NULL.thefinancialcoach NULL.co NULL.za).