This page looks at five types of money market investment:
Cash
We all know that cash does play a part in every portfolio and
provides a secure investment. The downside is that is does not
provide a very high return. Whilst it does play a role in every
portfolio it should not be seen in isolation. The common form
of investment here is the ordinary debit card/bank book savings
account.
Investment features:
- Little or no risk to capital, very liquid
- Therefore smaller returns on capital
- May not keep pace with inflation
Fixed
Interest
Fixed interest is similar to cash in that it is seen by most
people as a more secure and safe investment vehicle. Returns can
be predicted prior to investment in many cases, whilst in other
cases the returns are lower due to the area in which funds are
invested. We all know of the ordinary term deposit or 90 or 180
day Bank Bill. These would fit into this area.
- Traditionally this is a fixed rate of interest on money that
has been loaned to government and semi-government bodies.
- Income is generally guaranteed; however you can still sustain
a capital loss or gain, i.e. it is the percentage that is fixed,
not the capital.
Cash and fixed interest investments when combined should be the
base for all investment portfolios. The only difference will be
the amount that is placed into the two areas and not other asset
classes.
International
Bonds
International bonds are fixed interest products
on overseas markets, usually available in Australia through managed
funds. The international bond markets are not generally available
to retail investors except through these funds. They are a fixed
interest product, but the variations in currency rates (our dollar
against the foreign currency) makes the investment and the rate
of return more volatile (riskier) than local fixed interest.
Investment features:
- International bonds are the same as fixed interest investments,
however there are currency exchange issues that must be considered.
Futures/Foreign
Exchange/Options
Many of us have heard of the "Futures" market but do
not know what or how this works. When one talks about 'futures
or options" we are not talking about money we are talking
about a "commitment" to buy or sell something that is
traded in another market. An "option" is much the same
as it represents a right but NOT an obligation, to buy or sell
and underlying asset that is traded on another market.
Why are they used? The main motivation is to "hedge",
that is reduce or eliminate financial risk such as interest rates
risk or share price risk. There can therefore be an upside and
down side risk when interest rates or share prices change.
Both futures and options can also be used to speculate, sometimes
with spectacular leveraging effects. In short they are not for
the weak hearted and are not used by ordinary investors.
Whilst Prime Time is fully aware of this market, it is not one
that we deal in due to the inherent risks to our clients' portfolios.
Investment features:
- Highly specialised areas of investment
- Should be recognised as High Risk and High Volatility.
- Specialised advice is required
- Not for the faint hearted
Mortgages
- Placing money into Trusts which lend to others usually for
home purchase or commercial properties.
- Returns are structured in relationship to the risk and loan
to value ratios
- Generally safe up to 60% loan value ratio
Foreign
Exchange Markets
This is not an area that Prime Time Financial Counsellors Pty Ltd deals in as it has far too
many options that change on a regular basis. It also involves
close monitoring of taxation and accounting issues that do not
warrant us being involved. It is best left to the experts.
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