safer options for your money
26 March 2008
In view of the shaky global and local stock markets many people are wondering how to protect their money while still earning inflation-beating returns.
According to Toby Woolridge, pictured, head of go banking, following the collapse of Bear Stearns, one of the biggest banks in the United States, confidence in stock markets around the world had dipped. He said, more than R100 billion was wiped off South Africa's equity markets. "People who have extra money may want to consider safer investment options until calm is restored."
One such option is a money market investment account. The money market is an instrument of the fixed income market. Money market securities are essentially issued by governments, financial institutions, and large corporations and provide a stable return to investors. "They are considered extraordinarily safe but because they are extremely conservative, money market securities generally offer lower return than most other securities,'' said Woolridge.
He added that, in the current economic climate, returns on money market accounts could outperform risky investments.
"The yields on money market securities are linked to interest rates. So while rising interest rates are hurting consumers who are in debt, they are providing good returns for money market investors.'' According to Wooldridge, when looking for a money market investment account, look for the following:
An account that offers the best possible interest rate return. The greater the interest rate, the better your yield.
When comparing accounts, know the difference between the effective rate and the nominal rate and which of these is being quoted. This will allow you to compare apples with apples. While the nominal rate is calculated using simple interest, the effective rate is calculated on compound interest which means earning interest on interest. The effective rate is usually calculated over a 12 month period.
When comparing rates look at the nominal interest rate quoted by the banks - this gives you the immediate interest earned. Find an option that gives you immediate access to your cash or at least a reduced call period.
When the markets are as volatile as they currently are, you want to have as much control over your money as possible. You may come across an investment option that allows you to increase your portfolio and spread you risk. Don't lock yourself into an account that requires a minimum investment period or long notice period unless you are absolutely sure you will not find a better investment option or have a need to tap into that money at any point during the investment period.
Avoid complicated structures. This usually means that the financial institutions are trying to cover something up. Some institutes up the premiums they pay you in interest through the monthly bank fees and charges.
Check that the account does not require a start up or initiation fee. There are accounts out there that don't require this upfront amount.
Look for an option that allows you to start earning interest with even small amounts of saving. Some accounts require a minimum deposit amount.
Always check that the investment product/company is registered with the FSB (Financial Services Board) before investing. The FSB can be contacted on 0800 110 443 or 0800 202 087 According to Justmoney.co.za, South Africa's online guide to money, it is vital that people understand how a product works before they invest their cash. Paul Beadle, general manager of Justmoney.co.za, explains: "In a volatile economic climate, it is important that people save more - but the choice of savings options can be confusing."