23) Money Market Fund vs Fixed Deposit.
You may be wondering what is the difference to keep money in a Fixed Deposit compared to a Money Market Fund.
Assume both gave a similar return of 3% and with saving period of 12 months. Well, both will give you the full 3% after 12 months.
However, what happens if you need to withdraw the money halfway. Let's say you saved $10,000 in a Fixed Deposit for 12 months starting from 1 Jan 2017. Something happened on 30 Jun 2017 and you need $3000 to pay a bill.
Fixed Deposit Saving.
You had to withdraw the Fixed Deposit halfway the period.
The bank will not pay you half of the 3%. Instead, you will only get the $10,000 and little or no interest earned at all. You took out the $3000 and restart the Fixed Deposit with $7000 for the balance 6 months.
For 6 months period, the Interest rate will be lower than 3% per year.. Let's say only 2% per year.
So the $7000 will earn only 6/12 x 2% x $7000 = $70.
Total interest earned is only $70.
Money Market Investment.
Let's look at what happens if you had invested the $10,000 into a Money Market Fund. The Money Market fund increased its Net Asset Value all along the time. Different Money Market instruments returned the capital and interest as it matures over the period.
So, if you had withdrawn the required $3000, only the $3000 is affected. The balance $7000 still remained in the Money Market fund till the full 12 months period.
Also for the $3000 withdrawn early, you still earned the interest for the 6 months (1 Jan to 30 Jun). You still get 6/12 x 3% x $3000 = $45 as interest.
The balance $7000 will continue the full 12 months and earned 3% x $7000 = $210.
Total interest earned is $45 + $210 = $255.
So, you can now see the benefits of putting your money into a Money Market or Cash Deposit Fund, as compared to Fixed Deposit.
Main Benefits
Money Market or Cash Deposit funds give you the flexibility to withdraw the money anytime and no penalty will be imposed.
Corporate and companies also put their excess money into a Fixed Deposit account. The interest earned will be taxed. Returns from Money Market funds are non taxable.
More details at this link:
https://highlevelrules.blogspot.my/2017/07/benefits-to-corporate-investing-in-unit.html
Depending on the Management Company and fund, you may also get free Personal Accident Insurance for your investment into a Cash Deposit fund.
Indeed true...FD has the downside when the client is in dire needs of urgent cash!
ReplyDeleteI personally love to park my Emergency fund in this money market fund also. Every month can enjoy the distribution pay into the account. Most important thing is no contract or time frame to tight up my money. Somemore can enjoy free PA coverage (depend on which fund house u choose). Flexibility is there..... Always.
ReplyDeleteI have read many blogs but your blog are always very nice and now here I got some detail about the low risk investments Good work keep it up.
ReplyDeletelow risk investments
Quite an interesting post. It has been a very long time since I consulted a professional advisor, thus going through posts like this is going to be very helpful. I also found out about swp in mutual fund in the morning and considering it too.
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