Wed | Aug 16, 2017

Oran Hall | Investing in money market funds

Published:Sunday | July 23, 2017 | 7:00 AM

QUESTION: I am emailing to find out more about money market funds and how much a person can invest.

- Garfield

FINANCIAL ADVISER: A unit trust is an investment trust that pools the funds it derives from selling units to the public and investing them in various securities for the benefit of the unit holders.

A unit trust is managed by a management company, which is responsible for the day-to-day administration of its affairs, including the buying and selling of units, accounting, marketing, and staff welfare. It is governed according to the terms of the trust deed - a legal document.

Each unit trust also has a board of trustees, which is independent of the managers and acts as custodians of the investments, cash, and income of the fund.

The money market facilitates trading in short-term securities. These tend to be interest-bearing and may be issued by governments or corporations. And they tend to be low risk.

A money market unit trust, then, is a unit trust that invests primarily in short-term securities. Its unit values increase because the interest earned is reinvested and not generally distributed to the investors.

There are four Jamaican dollar-denominated unit trust funds identified as money market funds by name, but more than 75 per cent of all funds are identified as fixed income funds under various names and descriptions.

Like other fixed income funds, the unit values of money market funds increase as they earn interest - which they generally reinvest. They more or less have similar investment objectives, chief of which are safety of principal, or preservation of capital, and liquidity. To achieve these objectives, they invest heavily in Government of Jamaica short-term debt securities, including Treasury bills and repurchase agreements.

Unit prices are generally calculated on a daily basis by adding the income earned to the principal sum invested and deducting all charges specified in the trust deed. The result, the net asset value, is divided by the number of units to determine the price.

The funds tend to buy and sell units at the same price as there is not generally a bid price and and ask price.

Money market unit trust investments qualify as long-term savings accounts - LSAs - if they are held for five years, but investment is limited to a maximum of $1 million per year per investor.

Whereas the one year generally counts as a 365-day period, in the case of unit trusts, purchases made within a calendar year count for the full year. Therefore, an investor can make a $1-million investment in December 2017 and then make a similar investment in January 2018. This is a big advantage for these funds.

As LSAs, money market unit trusts are quite attractive to pensioners, particularly because they are able to access 75 per cent of the interest earned and are able to determine the intervals at which they collect interest payments. Families using the unit trust as LSAs should organise their investment to maximise their tax savings.

Although the funds generally reinvest all interest earned, a few funds distribute income to unit holders, thereby adding income as an investment objective.

Nevertheless, investors have the option of reinvesting their income distribution through the purchase of new units, but unit holders who opt to accept a distribution of income miss an opportunity to save taxes as their distribution is taxed.

As much as they generally invest in similar instruments, some funds perform better than others due

to differences in policy and management skill. Some managers, for example, are more aggressive than others, and as they are not required to hold their investments to maturity, capitalise on trading opportunities brought about by changes in the rate of interest.

There is no industry-wide minimum investment. One unit trust allows investments of $500 and another 100 units, in which case, the minimum investment is determined by the number of units and the unit price. Others require higher minimum sums.

Some unit trusts require that investors hold units for a minimum period - called the 'lock in' period - usually 90 days. They treat early encashment in various ways - from no early redemption fee due to there being no 'lock in' period, to a return of the principal sum invested, to a fee representing a percentage of the value of the units being encashed.

The unit trusts are quite accommodating and are willing to facilitate investors who wish to invest monthly if they can arrange an acceptable means of payment such as a standing order. This is a good way to invest.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.