The ins and outs of investing in money market funds –
Building Your Portfolio with Money Market Fund
Unit Trusts, more popularly referred to as collective investment schemes are poised to become an increasingly popular investment vehicle, this according to Christopher Walker, CEO, JMMB Fund Managers (JMMBFM); who points to the *16% uptick year-over-year, seen in funds under management across the industry, as at September 2017.
This trend is attributable to the conducive regulatory environment, which encourages investment in collective investment schemes (CIS), as opposed to repurchase (repo) agreements, said Walker. Against this background more investors stand to gain from an appreciation of the ins and outs, while reaping the rewards provided by CIS; such as above average returns and exposure to less risk especially in the case of average or smaller investors.
A collective investment scheme is an investment instrument in which individuals pool together their money with the primary aim of achieving greater returns, diversification and professional management of the combined resources. Investors’ ownership in the fund is determined by the number of units they hold. These investors are called unit holders.
Building Your Portfolio with Money Market Fund
For investors looking to ‘test the waters’ by investing in a CIS, a money market fund such as JMMB Giltedge Money Market (USD & JMD) Fund, would be ideal to get started. Money market funds are invested in largely short-term interest earning securities, such as, government certificates of deposits and treasury bills (T-bills) and therefore offer greater access to your funds and safety (compared to other fund types).
The JMMBFM CEO notes, “Similar to any other type of investment, an investor has to consider several factors namely: ones risk profile, investment goal and the investment horizon/tenure, in order to determine the best CIS to include as part of his/her investment portfolio.”
In touting the benefits of this type of the money market fund, Walker shares that it provides appropriate risk-adjusted returns, while balancing the need for greater access to funds and diversification. He outlines this type of fund is ideal for an average individual or institutional investor because of these benefits. The CEO continued noting, “Money market funds allow investors interested in preserving their funds and those with short-term access to their funds, an opportunity to invest and earn competitive returns above average savings rates with relatively low risk.
Even with a small amount of money, investors can get started by purchasing the minimum units in a particular fund at the daily net asset value per unit (price). Currently, the Jamaican-dollar denominated JMMB Giltedge Money Market allows investors to join the fund with a minimum subscription of 500 units, with the option to subsequently purchase additional units. JMMBFM also recently added a USD denominated JMMB Giltedge Money Market Fund to its suite of offering, with a minimum subscription of 100 units, at an initial offer price of US$1.
Benefits of Money Market Fund in Your Portfolio
In building an investment portfolio with a money market fund, investors can expect several benefits that typically outweigh the downside of this asset. Additionally, the returns and rewards that unit trusts offer are equally beneficial for small individual investors, larger investors and corporates seeking to diversify their assets. The benefits of the money market fund to your portfolio include:
Above Average Returns: In a low-interest rate environment where investors have short-term goals, the money market fund provides better returns when compared to the typically savings account. As evidence of this, J$ JMMB Giltedge Money Market Fund provided investors with a 4.21% return over the 12-month period, ending October 3, as compared to the average savings account across the industry which offers less than 2% per annum.
Ease of Access to Funds/High Liquidity: This fund offers the added ease of accessing funds, an option that is usually favourable to institutional clients, as units can be sold to access cash with sufficient notice, typically a minimum of 3 business days. This feature compares to most fixed deposit accounts that require a specified pre-determined investment period, and early withdrawal usually results in penalties.
Low volatility: The money market fund security's value does not tend to fluctuate dramatically, but changes in value at a steady pace over a period.
Diversification: The term ‘don’t put all your eggs in one basket’, best describes this benefit. The underlying assets of the unit trust generally offer diversification as the fund invests in a range of assets with varying maturity dates including: government and privately issued instruments securities.
Walker underscores, “Although the money market fund comes with these advantages, as with all funds, its use should be tailored to an individual investor’s need and portfolio. This fund should be utilized, therefore, as a transition investment vehicle geared towards short-term goals”. Adding that for medium to long-term investment objectives such as retirement planning, investors should consider other funds better suited to their investment timeline/ horizon and overall risk tolerance.
The money market fund is an excellent investment option for the investors, who are interested in gaining above average returns while managing risks.
*This figure excludes funds under management for JN Fund Managers.