Too often, however, investors are ignorant of how they can significantly enhance their returns on cash without limiting their options or taking a lot of risk.
The South African government offers RSA Retail Savings Bonds for relatively smaller-scale investors.
These are fixed rate or inflation-linked offerings with a maximum investment of R5m and a minimum period of two to ten years. The interest rate offered is market-related and currently ranges from 8% to 8.5% for fixed maturities of two to five years. The drawback of this option is that short-term liquidity is limited, and penalties are charged for early withdrawals.
Longer-dated fixed deposits are available to investors but, like retail savings bonds, these come at the sacrifice of short-term liquidity. As with current and call accounts, the interest rates offered on these facilities by the commercial banks are variable. While one can normally find that longer terms correspond to higher offered rates, this is not always the case.
Many businesses and individual investors hold their cash in a South African bank account. Call or current accounts are the most common options for investors who have not applied their minds to what to do with their cash. Investors in these funds currently earn anywhere from 0% to around 6%, depending on the investor's creditworthiness and the amount invested. Only those who have invested R1m or more can earn anywhere near the upper levels.
A money market fund is a regulated collective investment scheme that invests in various cash instruments with the aim of generating a high yield for its investors (taking into account certain restrictions on the duration of the instruments these funds can hold). Managers of money market funds take investors' cash and essentially invest it in short-term loans to government, high quality corporates and banks with the intention of generating interest income for the fund's investors.
Securities invested in include commercial paper, certificates of deposit and treasuries with a maximum maturity of 13 months. Money market funds have legal requirements to invest in qualifying investment grade assets, with the objective of ensuring a low risk profile for investors.
The managers of money market funds have significant scale benefits, as they are often investing billions of rands in cash instruments. These funds can invest in instruments not available outside the institutional investment market, and managers diversify the fund's exposure across different cash instruments and various different credit counter-parties to decrease risk. All these factors result in a fund that has 'clever cash' and which can be accessed by individuals, trusts, companies and corporates.
Money market funds also provide excellent liquidity to investors, as capital is available at 24-hours' notice. In addition - and importantly - the call/current account rates offered by the commercial banks tend to be some way lower than those of the average money market fund over time. While the degree of the difference may not appear material at first sight, when large sums of money are involved the difference can be significant. In addition, the compounding of these differences can result in a substantially higher return over time.
Within the current rising interest rate environment, money market fund yields have been growing steadily above bank short-term rates. South African banks continue to utilise this market as a means for obtaining regulatory funding. As a result, the money market curve is as steep as it has been in recent years.
Secondary market trading in corporate paper has also seen a positive upward trend, offering further yield enhancement and diversification benefits at acceptable levels of risk. All things considered, it is clear that in a constrained macroeconomic climate, the yield uptick offered by money market funds can no longer be ignored as a cash investment option.
With inflation rising in the South African economy, even at a reasonable rate, the value of your money and your company's capital is at risk of eroding over time. It is necessary to ensure that the cash component of your investment portfolio continues to grow above inflation.
Investors need to be aware that they have options when it comes to the return that they can get on their cash. Money market funds are a safe, accessible option to get a good yield on your investment without binding yourself to long-term commitments.
