Money markets: a compelling option

Cash is one of the major asset classes.

A diversified investment portfolio probably needs an element in cash – if only for liquidity to take advantage of any new investment opportunities that emerge.

That’s where money market funds can play a crucial role.

Such unit trust funds are the perfect parking place for cash.

Not – as you’ll read on the pages that follow – as a long-term investment but for capital intended for a specific purpose in the future. The cash is safer than money in a bank account and you will get a better yield than you can squeeze out of your bank manager.

Money market funds are very popular, attracting a large part of the net inflows into unit trust funds – but often for the wrong investment reasons, as you’ll also read.

They’ve become an escape hole for investors scared of the equity market. That’s fine for now.

But like money in a call account at the bank, investment capital shouldn’t be left there for too long – not if the investor wants to significantly outperform inflation.

In the unit trust industry money market funds compete with fixed-interest funds, which have a far broader investment mandate. The underlying investments in money market funds are strictly controlled by regulations.

Outside the unit trust industry money market funds compete with banks and, as mentioned, they’re lower risk and provide higher returns.

There was some resistance from banks when money market funds were first introduced to the market. But as is so often the case with banks, if you can’t beat them, join them. All the asset management companies now owned by a bank offer money market funds.

Used intelligently, money market funds can be a sound investment. They carried investors through the equity market meltdown in 2008.

There are advantages, and some risks, and those are examined on the pages that follow. It’s often said cash might be trash (as an investment). But if you want cash in your portfolio, money market funds are the place to look.

 - Finweek
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