A money fund is a unit trust or “pooled” investment where a number of investors’ money is pooled together in order to benefit from higher rates of deposit. The fund is able to use its buying power to achieve wholesale rates of interest which are usually better than could be achieved by the individual investor. The main attraction is the higher rates of interest available from pooling your money with others.

In most cases, the fund will buy money market instruments including:

Short term Government bills and notes, Bank certificates of deposit and Commercial Paper.

The instruments will normally have a maturity date of less than one year and your IFA will not recommend a fund until they are satisfied with the credentials of the managing investment house. The fund must only invest in instruments issued by Government bodies and Banking institutions which satisfy the very highest credit ratings. Generally, the type of instruments purchased by the fund are viewed as low risk and a broad range is purchased, so exposure to any one area is low.

The aim of the fund is to return your capital together with the accumulated interest. It is unlikely that you would see a reduction in the value of your capital unless you have invested in currencies outside your usual range (see ‘currency risk’ below). Most investment houses do not charge entry or exit charges but levy a small annual management charge of between 0.25% and 1% per annum.

Because interest rates can vary, they will provide different recommendations at different times. They should however always be with recognised investment houses with appropriate credentials.

In addition to the issues covered above, you should consider the following:

Inflation: even though the rates of interest may look attractive, you should be sure that you are getting returns in excess of inflation e.g.

In circumstances such as those illustrated above, a money fund should only be used as a short term ‘parking’ place for cash.

Often, seemingly attractive rates will be available in currencies other than the ones which are most relevant to you. Currencies can be volatile and you can be potentially exposed to wide gains or risks if you invest outside your normal currency. For example, at the time of writing the highest rates were available in Australian dollars. People with no financial connections with Australia should thing carefully before buying into such a fund. If on the other hand, you want to take a currency risk and speculate against rises and falls in the value of currencies we would normally advise you to consider a managed currency fund designed specifically for that purpose.