Money Market Funds - Protect your Savings without the Paperwork
In the current climate of uncertainty with the Banking system, people are generally uncomfortable with holding large cash balances within a single Banking Group. Presently if a Bank fails, the Financial Services Compensation Scheme (FSCS) provides 100% cover for the first £35,000 of an individual’s deposit. This maximum 100% compensation under the FSCS is expected to increase by the end of the year to £50,000.
The Current Solution - Multiple Savings Accounts
The solution widely used to reduce any potential risk is to spread cash balances between numerous Banking Groups, with no more than £35,000 in each.
The Alternative Solution – Money Market Funds
We believe clients’ have an alternative to spreading their cash between multiple banking groups in order to reduce their exposure to the risk of a failing bank. Clients’ with large cash holdings can invest a large amount of their cash in a IMMFA member Money Market Fund.
Money Market Funds
Triple-A rated money market funds that are members of the Institutional Money Market Funds Association (IMMFA) can be used to complement a client’s Savings/Deposit Accounts in order to achieve the primary objective of greater security on cash holdings.
The main benefits of IMMFA Money Market Funds are:
- Diversification - With a bank deposit, an investor would be exposed to a single banking name. A Money Market Fund provides the diversification of this risk typically across 50-100 highly rated, short term issuers.
- Triple-A Rating – Majority of banks are rated by agencies as AA or lower whilst IMMFA Money Market Funds are triple-A rated.
- Ring-fencing of assets – Most money market funds are UCITS compliant (part of some European legislation to provide cross border standards) and thus are standalone entities in their own right. Their assets are entirely ring-fenced from their parent investment manager and from the custodian. With a bank deposit an investor is effectively placing its cash on the bank’s balance sheet.
- High degree of liquidity - Using a money market fund gives the depositor the advantage of same day or next day access to their cash with the added benefit of a stable 7-day benchmarked return. Moreover, there are no investment lock-in periods, penalties or ‘break’ fees for redemptions unlike some bank deposits.
- Competitive return - Money market funds are able to offer competitive rates of return when considered alongside bank deposits.
Taxation
For UK residents investing in offshore Money Market Funds, Income Tax will be applicable to any distribution/dividends made by the fund, whether accumulating or distributing. Our understanding is the Income Tax would be applicable as Dividends Income (taxed at 10% basic rate or 32.5% higher rate), rather than Interest Income (taxed at 20% basic rate and 40% higher rate). You should seek clarification on this from your accountant.
Although there could be a tax benefit of investing in an offshore money market fund, (compared to Bank Deposits) legislation could change in the future. The primary reason for using money market funds is to reduce your risk exposure rather than tax reduction.
Risks Warning
- Whilst investments in triple-A rated money market funds are made in high quality credit instruments, there can be no assurances the issuers will not fail to meet their obligations leading to losses.
- Value of investments and the income derived from them may fall as well as rise.
How to access Money Market Funds?
Clients will be able to access the recommended Money Market Funds via the Raymond James Investment Services (RJIS) Wrap Platform. Although there is a dealing charge of £27 and a Custody Charge of 0.15% per annum levied by RJIS, the facility allows us to access the Institutional share Class of the selected Money Market Funds, having lower charges.
Sophie Stewart - London
