Whilst the historically low official cash rate (OCR) may be great news for current mortgage holders, it is a well known fact that it has not been so good for those with cash savings. Not all cash is equal though.
You might be able to achieve higher returns in a Money Market Fund.
What is a Money Market Fund?
A money market fund is an unlisted managed investment scheme, with investment objectives of capital preservation and yield generation. They achieve these objectives by investing in a diversified portfolio of high-quality, low-duration money market instruments
The Fund is managed by market professionals, who pool the savings of individuals and invest them in a larger range of fixed interest products than available to most individuals.
These fund managers invest in term deposits and high quality, highly liquid, short term securities, usually with maturities of less than one year, providing higher returns than term deposits but with relatively low levels of risk. They also provide the advantage to retail investors by giving them access to bonds in wholesale markets which are otherwise only open to people investing a minimum of $500,000.
It is important to note that, unlike a term deposit, Money Market Funds can lose (or gain) capital value. Investments also do not receive the government’s deposit guarantee that can apply to bank deposits of up to $250,000 per customer and per institution.
How does a Money Market Fund work?
One example of the Money Market Fund is the recently-launched Arminius Capital EMMA (Executive Money Market Account) Fund, which may invest in any of the following assets in Australia:
- Cash deposits held at the main Australian banks including their subsidiaries, and Bank Accepted Bills or Bank Endorsed Bills
- Interest bearing investments issued by the Commonwealth of Australia or any State or Territory in Australia
- Investment grade Corporate bonds with a callable date or maturity date of less than 365 days
- Hybrids, redeemable preference shares, convertible notes, capital notes and interest bearing equity instruments
The objective is to aim to provide an income return, before costs and tax, of 3-4% pa, which is higher than rates on term deposits, and the risk level is low to medium. Distributions are paid quarterly. The suggested minimum investment timeframe is one year although investors can withdraw their funds when they wish.
Although it is technically possible for investors to replicate a portfolio built by market professionals like Arminius, it requires plenty of time, patience and knowledge and for most people it is impractical.
Tempting as it may be to leave their hard-earned money in term deposits, depositors owe it to themselves to consider – carefully – some alternatives.