EXPLAINER: What's the difference between money markets and unit trusts?

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Cape Town - A Fin24 user wants to know the difference between a money market account and unit trusts.

He writes: I want to invest R250 000 for a period of five years. Which investment option is the best and least risky?

Ester Ochse, financial advisory product specialist at FNB, responds:

A money market account is essentially a short-term investment account which is held with your bank. One gets various formats of a money market account, such as a 7-day or 32-day account.

This type of account is an ideal "parking bay" if you will be using the money in the next year or two. Also, it is the best place to keep your emergency fund, especially for when those unexpected incidents happen.

The advantage of a money market account is that it is easily accessible (depending on the rules of the account) and not exposed to any market fluctuations. Therefore, your R100 can become R105, regardless of the stock exchange and property market.

The downside of a money market is that it will underperform inflation over the long term. Therefore, this is not a good way to achieve your long-term investing goals, such as retirement.

Unit trusts

A unit trust, on the other hand, allows the man on the street to gain access to normal asset classes - such as shares or property - they might be nervous of, because of lack of knowledge or funds available.

A unit trust investment is done by either a monthly debit order or a lump sum amount. The investment house then takes all the contributions from all the investors and buys the underlying asset classes such as shares, bond or property.

In return for that, the investor gets a unit in the fund. As the underlying asset class goes up and down, so does the unit price. Having exposure to all these asset classes and being in a properly diversified portfolio with the right asset allocation, should help you achieve your financial goals.

There are unit trusts that invest just in shares, bonds, property. Then you also get ones that have a mixture of these asset classes.

It is important to remember to have the right mix for the right time horizon. The longer the time horizon, say 10 years plus, the more exposure you needs to growth assets such as shares and property.

If you are saving for a time horizon of 5 years, as is this Fin24 reader, there needs to be exposure to growth assets, but also to the more stable type of investment which should smooth the returns.

A unit trust in this case could be the right option, with a mix of shares, property, bonds and cash. Consider a medium equity fund, but it is best that you get advice on the correct allocation.

Remember, it is best to start saving and investing sooner rather than later, and every little bit helps. But it is also important to chat to a qualified person to assist with making the right choice when it comes to unit trusts.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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