Money Market Unit Trusts
From Financial Literacy Wiki
Money Market Unit Trusts are unit trusts that invest in money market instruments. So to understand more about this type of unit trusts we need to know what is a Money Market.
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What is a Money Market?
Despite its name, the Money Market, does not trade in currencies.
Rather, it trades in low-risk, high liquidity, short-term debt instruments issued by governments, financial institutions and corporations. The maturities of these securities range from one day to one year, but are often less than 90 days.
Money market securities generally comprise of US Treasury Bills, commercial papers, bankers' acceptances, certificates of deposits and repurchase agreements.
How it works
Generally, money market instruments work on the principle of 'discount'. Let's say there is a U.S. Treasury Bill with 90 days left to maturity may have a face value of $100,000, but is selling in the money market at $98,500. If you buy it at this price, all you have to do is wait 90 days, for the debt instrument to mature, and you can redeem this note from the U.S. government for $100,000, and pocket the profit of $1,500, which works out to be 6% per annum.
A large corporation, or a bank, can also issue something similar to the example above. These are refered to as commercial papers or banker's acceptance, and traded in the money markets using the same principle of discount.
Money market securities are considered very low risk. U.S. Treasury Bills (T-Bills), which are guaranteed by the U.S. government, are practically default free. The 'discount rate' of these T-Bills, (in our above example, 6%), is usually used as the proxy for the 'risk-free' rate of return.
Debt notes issued by corporations or banks and traded in the money markets are often also guaranteed and of high quality, and the default rate is usually very low.
How to invest
Unfortunately, most money markets cater to institutional investors and are not accessible to retail investors. The only way to participate is to buy a money market unit trust.
You will find that some of these unit trusts have performed very consistently, returning between 4% to 7% annually(Please note that these rates are not guaranteed and may vary across these unit trusts).
Suitable for What Type of Investors
Money market unit trusts are great for investors who are risk averse. Investors who are thinking of taking money out of their fixed deposits and investing in unit trusts might find that money market unit trusts are a great way to start because of their low-risk nature.
Even for investors who are familiar with unit trusts, most experts recommend that some portion of their investment portfolios should comprise of money market instruments for stability and liquidity. In case you need some emergency cash, you can redeem your money market unit trusts with almost no loss to capital.
