Easy in, easy out

Melanie Oley on the considerable benefits of single currency funds

With the low level of interest currently being offered on deposits by banks and building societies, savers may well be looking for a better rate of return on their deposits. Money funds or single currency funds are often able to provide this return without the risk of capital erosion.

Money funds offer investors a low cost, low risk method of managing cash for both the short and long term. The reasons for investing in money funds are varied – investors may simply wish to maximise the return on their home or base currency or (through investing in a fund denominated in a currency other than their home currency), have the opportunity to make gains (and losses) through exchange-rate movements. Money funds are also useful vehicles for those who have a liability in a foreign currency, such as a holiday home abroad or regular work overseas.

A money fund is essentially a diversified portfolio of deposits usually placed with a number of financial institutions. These funds normally comprise deposits and other short-term financial instruments available on Eurocurrency and domestic markets. These short term financial instruments available on Eurocurrency and domestic markets. These short term financial instruments can include certificates of deposit, which have the flexibility of being able to be sold before their redemption date at the prevailing market price.

The key to managing a portfolio of deposits is to pay careful attention to the length of individual deposits in the light of the current interest rate scenario. Managers will normally factor probable interest rate movements into their investment decisions. If interest rates appear stable or likely to rise, a shorter than average life to maturity may be selected. Conversely, if it looks likely that interest rates will fall, it is more prudent to select a longer than average life to maturity.

The major benefits offered by money funds are their attractive returns, their low risk investment approach and their easy accessibility. By pooling the individual deposits within a fund, investment managers are able to negotiate wholesale money market rates. The cost of investing in a money fund is minimal: most managers will only charge annual management fees, typically 0.5 per cent to 1 per cent, with no initial charges and no exit fees (commission to intermediaries, paid from the annual management fee, is offered by some companies). Unlike some of the higher rate deposit accounts available through building societies, money funds have no fixed period of deposit, offering easy accessibility.

Money funds can be useful financial planning tools. Many are available as accumulation units, whereby all income gained is rolled-up into the price of the units and any taxation is deferred until units are sold or transferred.

In an accumulation fund, all gains are treated as income for tax purposes, thus avoiding any CGT liabilities. The advantage of accumulation funds is that investors can defer the sale or conversion of their shares until their tax position is more favourable. Money funds are useful for those planning to retire or move abroad. They are also useful places to 'park' funds between other investments. Many institutions offer money funds within an umbrella structure, making switching between funds simple and cost-effective.

Melanie Oley works for Guinness Flight Global Asset Management.