Investors in Saambou's money market accounts are furious because they are unable to access what is supposed to be a liquid investment (one that is available to you when you ask for it).
All accounts were frozen when Saambou was placed under curatorship in February. Since then, the bank's curator has been making funds available to depositors piecemeal. However, in many cases, depositors with more than R4 000 in their accounts cannot yet access any of their money.
Meanwhile, Sanlam says that money market funds still provide a safe place to park your cash during times of market uncertainty.
Fanie Lategan, the head of unit trust products at Sanlam Life, says money market funds are suitable for conservative investors dependent on a fixed income, and are safer than bank deposits.
Many investors don't know that there are two types of money market investment vehicles. The one is a bank deposit account and the other is a unit trust fund.
Both vehicles invest in money market instruments, but they differ in structure and many other respects. Some of the key features of money market funds are:
Diversification
Money market funds are unit trusts regulated by the Association of Unit Trusts. Diversification is an important feature of the unit trust industry. This means that fund managers are obliged to spread a money market fund's underlying investments among different institutions. The regulations for money market funds are:
- That a maximum of 30 percent of the fund may be invested with institutions with assets of more than R2.5 billion;
- That a maximum of 20 percent of the fund may be invested in institutions with assets of between R250 million and R2.5 billion; and
- That a maximum of five percent of the fund may be invested in institutions with assets of less than R250 million.
The risks for the fund and, consequently, the unitholders are lower because the assets are diversified in this way. If one of the underlying securities defaults, your capital is still protected, as the investments are spread among numerous financial institutions.
Asset composition
Money market funds invest in institutional money market instruments that are often not available to ordinary investors. Such instruments include bank deposits, banker's acceptances, wholesale call deposits and negotiable certificates of deposit.
These funds also invest in underlying investments which mature in less than year. Securities with shorter maturity terms carry less risk than those with longer investment terms.
Assets are kept in trust
A unitholder's money is not kept at the company managing a particular money market fund. The money is pooled with other investments held by a trustee company appointed by the Financial Services Board.
The trustee company is not allowed to have a holding or subsidiary relationship with the management company.
Lategan says this regulation ensures that your money is not at risk if the management company of a money market fund gets into financial trouble. The solvency and size of the management company does not affect investors as it does in the case of a bank.
Ratings
Due to the strict limitations prescribed by the trust deed to which money market funds must adhere, most management companies don't bother to have their funds rated for financial strength. However, management companies can ask an independent rating agency to assess their funds.
Tax
Although the income earned from money market funds is taxable, there is good news for investors in these funds in the latest Budget.
Lategan says that, from March 1 this year, the exemption on interest income has been raised to R6 000 for taxpayers under 65 years of age and to R10 000 for taxpayers aged 65 and over.
At current money market fund rates, the value of a senior citizen's investment would have to be more than R100 000 before he or she would be liable for tax (assuming that he or she does not have other interest-bearing investments).
Liquidity
Unlike a fixed deposit at a bank, money market funds are totally
liquid. The investment can be cashed in at 24 hours' notice.