ADVISORY COLUMN: Investing US$25,000 short term
QUESTION: I saw your column online and would like your advice about how best to invest US$25,000 short term, say three months, and roll over, taking the interest out at maturity. What advice can you give me?
FINANCIAL ADVISER: If you propose to roll over your funds, it would mean you intend to reinvest the interest that you earn at each maturity and thus benefit from compounding.
Naturally, you would take your principal and all the interest earned thereon when you finally decide to close that account.
The benefit of investing for three months at a time is that there would be more compounding periods than for a longer term such as six months. This could make your yield higher than if you invested for a longer term, but that would depend on the relative difference between the rate applicable to each term.
Generally, you would expect to get a higher rate for the longer term, so there is no guarantee that you would benefit from the higher number of compounding periods that the three-month instrument would give you.
The instrument that would most likely be of value to you would be the repo. But repos are being phased out. I identified two investment dealers that are offering repos, but there could be others. The rate for US$25,000 for 90 days hovers around 1.5 per cent. The sum you have is quite a bit above the minimum of the companies with which I have made contact.
There is an alternative; the US dollar-denominated money market unit trust.
Generally, repos are giving way to unit trust investments in the Jamaican financial marketplace. Although they have no maturity date, they are quite liquid because by nature, as open-ended funds, the trusts buy back units from unit holders. In this sense, your funds would be more accessible than if you were to invest them in repos, which are for a specified term.
The unit trust approach would allow you to spend less time managing your investment as you would not need to keep track of the maturity date nor to be concerned with discussing rates at each maturity date unless you chose to give discretion to the financial institution to reinvest the matured funds without consulting you.
This approach would likely give you a better return as a repo would restrict you to one instrument, while a unit trust would give you the benefit of participating in a diversified portfolio of securities, which would serve to reduce your risk.
You should not have any difficulty investing in this instrument as the minimum investment allowed is quite small - 100 units in one case and US$50 in another case.
Bear this in mind: if you need to take the interest earned on the repo at some point, you can do so, but you will not have the benefit of that option with the unit trust. To get any cash from that investment, you would have to sell at least some of the units.
Although I must tell you not to expect any great returns, the action you are considering is a prudent one in light of the weakness of our currency. This is one way to protect your purchasing power.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org