Because their names are so similar, many people are unaware of the differences between a Money Market Account and a Money Market Fund and, as a consequence, are not aware of the different purposes that these two structures are designed to achieve. Money market accounts and funds are very different in respect of how they are regulated and structured, what interest is paid or earned, how fees are charged, the risk that they present to the consumer, and how they should best be incorporated into one’s portfolio to ensure they are fit for purpose.
Money market accounts
A Money Market Account is a deposit account offered by a bank or financial institution, and operates on a similar basis to a normal savings account into which you would deposit money, although the interest rates offered by a Money Market Account are generally higher.
Banks that offer Money Market Accounts as part of their suite of accounts will advertise the interest rates upfront which means that customers are aware of exactly how much interest they will earn on their funds going forward. From a risk perspective, the funds held in a Money Market Account are exposed to the risk of a single bank which means that your money could be at risk if the bank runs into financial difficulties. Generally speaking, though, Money Market Accounts are low-risk and highly liquid, and account holders are able to access their funds at very short notice.
Providing incrementally higher interest rates than savings accounts and slightly less than is offered by a normal savings account, Money Market Accounts are appealing because they give the customer 24/7 access to the funds making them ideal for housing emergency funds required at short notice, or where an account holder needs to make frequent withdrawals. This is because most banks provide internet banking, ATM functionality as well as debit and stop order capabilities as part of the Money Market Account offering, allowing account holders to withdraw funds and transact at will. Because these funds are so liquid, the interest earned on Money Market Accounts is generally lower than that offered by Fixed or Notice Deposit accounts.
Most Money Market Accounts require minimum deposits of between R10 000 and R20 000 depending on the bank, and fees are generally charged per transaction. When it comes to interest, most banks offered tiered rates based on the balance in the account, with both the capital and interest being guaranteed. From a regulatory perspective, Money Market Accounts are recognised as short-term deposits by the Financial Sector Conduct Authority (FSCA). When it comes to using a Money Market Account for maximum benefit, such an account is essentially a beefed-up savings account for the longer term, but which also provides you immediate access to cash if your circumstances require.
Money market funds
On the other hand, a Money Market Fund is an investment product that falls within the FSCA classification of Collective Investment Scheme and which is regulated by the Collective Investment Schemes Control Act. Being actively managed funds, Money Market Funds are generally invested in a range of instruments including the likes of promissory notes, commercial papers and Negotiable Certificates of Deposit.
Whereas the risk of a Money Market Account is limited to a single bank, Money Market Funds are well-diversified across numerous institutions. It is the job of the fund’s asset manager to actively seek appropriate investment opportunities in order to provide a higher yield for the investor. As such, investors can expect to generate more favourable returns in a Money Market Fund structure as a result of the additional risk taken than can be expected by a Money Market Account holder.
From a risk perspective, Money Market Funds allow consumers to earn interest in a lower-risk environment than the stock market, while still benefiting from diversity. That said, a Money Market Fund remains an investment as opposed to a bank account, which means that investment returns are historic and fluctuate on a daily basis and, further, capital preservation is not guaranteed.
The minimum deposit requirements of a Money Market Fund are generally substantially higher than that required by a Money Market Account, with many asset managers requiring a minimum deposit of around R100 000. Although also liquid, accessing funds in a Money Market Fund is not immediate as it generally takes between one and five working days in order for the transaction to take place following a written instruction from the investor to the asset manager.
As in the case of any investment, Money Market Fund investors can expect to pay an annualised management fee which is fully transparent. With slightly slower turnaround times for withdrawals accompanied by higher expected returns as a result of some risk, a Money Market Fund makes an excellent holding bay for cash while you are in the process of making investment decisions. It is also an excellent place to park savings where you are working towards a goal such as paying a deposit on a home or planning an overseas trip.
Deciding between a Money Market Account or Fund involves careful consideration of your goals and the intention for which your money has been earmarked. Keeping money in a Money Market Account or Fund simply because you are fearful of exposing your cash to the markets is never a good idea as the purchasing power of your money will not really grow over time. Both Money Market Accounts and Money Market Funds are designed to house funds earmarked for shorter-term use, each presenting its own set of advantages and disadvantages depending on the unique circumstances of the account holder or investor.