One word: Liquidity. Money market funds typically invest in short term monetary instruments, such as deposits in the banks. The advantage of these funds is that they can negotiate a flexible and better rate due to their sheer fund size as compared to individual's deposits.As an investor, money market funds are useful as a temporary parking facility, i.e. to temporarily deposit the money in a liquid instrument after switching out from equity funds. Another plus point is that most of the money market funds don't incur sales charge and typically only charge 0.3 - 0.5% management fees per annum.So, the question of whether you should have money market funds in your portfolio? The answer is YES, if you fulfill the following requirements:- You want to switch out from equity to cash while waiting for market upswing.
- You have spare cash lying idle in the deposit accounts in the bank. Money market funds generally have a better yield than savings/current accounts in the banks.
- In Malaysian tax perspective, money market funds are potentially more tax effective, if you have large sum of cash in the banks in the form of savings account/fixed (time) deposits as the interests earned from these accounts/deposits might incur tax.
During financial crisis time, there is a tendency for investors to switch out of equity to financial instruments that are stable, such as cash, money market, capital guaranteed funds and fixed income. Let's look at these individual financial instruments and see how each of these fits into your portfolio during financial upheaval time.- Cash -As people says, cash is king. It is liquid and can be deployed at any time. No doubt on that. BUT, sitting on a pile of cash for long term is counter productive as cash hardly generates any income even if we park them in the fixed (time) deposits. Cash can be a good option if your portfolio is mainly consisting of shares.
- Money market funds - this is a better option if you are mainly investing in unit trusts/mutual funds. Money market funds are basically unit trust funds that invest in short term money instruments and are highly liquid. Investors will probably get a better deal than parking their money in savings account.
- Capital guaranteed funds - these are primarily close ended funds which has a small portion in equities. The good point is that you dont lose your capital if you hold through maturity even in the downturn, but do get to enjoy the upswing via the equity portion of the funds.
- Fixed income funds - mainly consisting on bond investments. It's a liquid investments with minimal fees but typically an investor will need to hold the funds for longer terms, such as longer than 6 months to enjoy some returns.
As a general guideline, if you do plan to re-invest in the short term in shares/stocks, you should hold cash, but if the majority of your investments are in unit trusts/funds, you should consider switching to other funds mentioned above.
I'm back after such a long hiatus. It's almost the end of year 2008 and wow, what a year it has been. In 1998, we were hit with financial tsunami. Some of our corporations and individuals were caught with their pants down or worse lose their pants all together. Ten years later, another tsunami is hitting our shores and this time it's the MOTHER TSUNAMI.
Looking back at the beginning of year 2008, a lot financial pundits were predicting new highs for almost any asset class. As common sense tells us, whatever goes up must come down, and this time really it did crash, and crash hard! Most of us and the rest of the world panicked and try to sell off their financial assets at a huge loss. But of course some of us with barrels of cash in hand are getting elated at the golden opportunity that might come once in a life time.....
So what have I been doing this year? I started building a portfolio of unit trust funds beginning June 2008 and still waiting for further investments. As I mentioned before, whatever that goes down will goes up again and who knows it might shoot through the roof one day? That day might not happen in 2009, but with gradual accumulation of financial assets at beaten prices, surely that day will come and that's the day you will laughing all the way to the bank.
So how do you handle your finances in 2009? Below are some of the pointers that I can foresee some of us doing:
- Start checking your cash flow status - try to monitor what goes in and out of your bank account and at the end of the month, see whether you are in the black or red. This is a very important step to know your financial health, especially in financial turmoil time. You might be a millionaire with ten bungalows but with negative cash flow, you might end up with nothing if the disaster hits you one day.
- Reduce unnecessary spending - if you are in the red, you should reduce your spending immediately. It doesn't matter where you want to cut your expenses, but make sure you cut enough until your cash flow is positive. I know this is tough financially and emotionally, but think about this, what is more painful than losing all you have, all that you've paid for because you cant pay off your debt?
- Start saving - with positive cash flow, you need to start saving the extra money monthly. If you don't have any emergency fund, try to build it with a target size of at least six months of your expenses. Put this money away in time/fixed deposit and never ever touch it until emergency time.
- Be positive - having some cash buffer around during rainy days can bring positive aura/mood to a person because you know you have done your basic job in protecting yourself financially, emotionally as well as psychologically. After building enough emergency fund, you may use the extra cash to invest.
- Buy low, sell high - 2009 might be a good time to buy financial assets because prices are coming down hard. You might not be able to buy at the lowest price point, but i guess you are close to that. Who knows ten years later looking back, you are glad that you did buy low and lower.
As people said, Roman is not built in a day. This is the same case here. What is critical is to stop procrastinating and start the steps mentioned above. As for me, I'm looking at step 5 now and looking forward to another exciting 2009....
Watch out 2009, I'll be hunting for more!!!!!!
