BG650 Money Market Investments
Taxco Business Guide
The money market provides an effective vehicle for assisting in cash flow management. By offering investments in short and long term deposits on surplus cash, the money market provides opportunity to enhance returns.
A flexible investment available for clients wanting market-related interest rates with liquidity and full access to funds, as well as full transactional functionality. Interest rates increase with higher balances.
The money market
That sounds simple enough, so why don't more brokers offer you the ability to buy money market securities? The reason is that money market securities trade in very high denominations, giving the average investor limited access to them. The easiest way for retail investors to gain access is through money market mutual funds or a money market bank account. These accounts and funds pool together the assets of thousands of investors to buy money market securities.
Some investors also purchase Treasury bills (T-bills) and other money market instruments directly from Reserve Banks or through other large financial institutions with direct access to these markets. There are several different instruments in the money market: certificates of deposit, T-bills, commercial paper, banker's acceptances and more.
- Earnings are dependent on the prevailing balance in the account and the interest rate band within which the balance falls
- Electronic channels - (internet, self-service terminals, telephone banking) provide access for transfer, payments and enquiries
- Debit and stop orders may be processed against the account
- ATM's - Deposits and withdrawals may be made at any time, including at ATM's
- Unique - Cheque card allows you to access your account at thousands of merchants locally and internationally
- Debit and stop orders may be processed against the account
- Electronic channels (internet, self-service terminals, telephone banking) provide access for transfers, payments and enquiries
- Vehicle - Garage cheque card is also available for all vehicle related expenses
- Interest - is calculated on the daily balance, and paid monthly
Products and services
The money market offers clients a comprehensive range of products for various investment terms, with competitive money market rates, depending on their geographical location. The product include:
- Call accounts, which are interest-bearing accounts allowing funds to be deposited and withdrawn on demand
- Term deposits (at fixed or floating rates), providing a secure investment suited to investors who require a higher yielding rate of return for a specified investment period
- Certificates of deposit, which are trade-able fixed deposits most frequently issued for terms of three to twelve months
What Is a Money Market Investment?
A money market investment is an account held by a bank or other financial institution that keeps its cash in short term debt obligations. This is done to insure maximum safety for the money market investment principal while providing a modest return. The short term debt obligations held in money market investments are usually from highly rated companies and government agencies.
Money market investments have the potential to make, on average, two to five percent per year. This modest rate of return is the result of their conservative investment strategy in short term debt obligations. Money market investments put their money in treasury bills, certificates of deposit and commercial paper. Money market investments are considered open ended investments, meaning investors add and withdraw funds from money market fund accounts at any time without penalty.
One of the benefits of a money market investment is the low risk to principle. It is possible to effectively lose money in a money market investment, though it is very unlikely. If the interest rate were to decline below the rate of inflation, the money market investment loses buying power. Money market investments are usually not FDIC insured. You might not get your money back if the company holding your money market investment goes bankrupt.
Money market investments are among the most significant in finance. Since they act as holding places for cash waiting to be invested, they are some of the most widely owned securities. Proceeds from sales of stocks, bonds and mutual funds are often directed to money market investments. Interest and dividends from other investments are often transferred automatically into money market investments.
Investors must take into consideration that money market investments are not all the same. Different funds invest in different securities and pay different interest rates. It is important to compare the performance of money market investments. While past performance is not a guarantee of future return, it will give investors an indication of the potential of a money market investment. Keep in mind that interest rates often change without notice.
Objectives and Risks
Institutional investors have used the money market as a safe haven for quite some time. The emergence of money market mutual funds has allowed individual investors to take part in the money market's rates of return, which are higher than those of a savings account or other low-risk investments. The performance of a money market fund depends heavily on the interest rate situation; the best time to put your money in money market funds is when interest rates are peaking.
Money market funds are low-risk investments because they invest in short-term government treasuries such as T-bills and in highly regarded corporations. The one downside of money market funds is that they are not covered by the same federal securities insurance that covers bank accounts, although some funds pursue insurance through private companies.
How to Buy or Sell It
Today, money market funds can be purchased through just about any bank or broker. If you are looking to invest directly in the money market, then you may need to get a full-service brokerage, although you can sometimes buy directly from the government.
- Gains on money market funds are usually tax exempt because they invest mainly in government securities. However, any interest is taxable.
- Because they are a good low-risk investment, money market funds are widely used defencive investments when the stock markets are declining.
- Although returns on a money market fund are higher than those on a savings account, they are still much lower than returns on equities or bonds.
- Some money market securities are very costly (easily in the R100,000 range), which makes it difficult for individual investors to purchase them.
Three Main Uses
- Income Protection
- Capital Appreciation
- Tax-Exempt Savings
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