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Is a money market fund right for you right now?

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Money market unit trusts have become popular as they appear to provide a safe, secure and reliable haven for your investments. 

During times with extreme volatility, you may be comforted knowing that your hard-earned rands will earn interest, as you put your money in and you get it back with a sliver more. But, no investment is risk free, so the question is – are money market funds right for you, now?

“Many investors have flocked to the safe havens of money market and income funds due to South African equities delivering lean pickings over recent periods,” explains Earl van Zyl, head of product development at Allan Gray.

Data by the Association for Savings and Investments South Africa (Asisa) released in February mirrors this sentiment, showing that that income funds posted real returns of 4% in 2018, and in the last three years, they have performed well with higher real returns than low-equity cautious funds.ADVERTISING

“But the reality is that investing 100% of your assets in rand-based money market funds may not be right for you, especially if you are investing for a long-term goal like retirement or for your child’s education,” cautions van Zyl, adding that money market funds are not entirely risk free.

The pros of money market funds

Money market unit trusts are great for money in transition, or for a short-term savings or emergency plan. “They are an effective parking place for your money,” asserts van Zyl. “They allow you to store money that you will use in the near future, while getting some returns.”

He adds that one of the benefits of money market funds is that your money is easy to access. They are more liquid than a fixed-deposit account with a bank, and don’t hit you with penalties that often apply when you request access to your money from a fixed deposit.

A second benefit is that your eggs are not all in one basket. “A money market unit trust has investments across lots of issuers, whereas a deposit is only with a single bank,” states van Zyl. “Even though the bank does guarantee your deposit, banks sometimes fail, so although your risk is low, it is also concentrated.”

The risks of investing in a money market fund

Van Zyl cautions that it is a misconception that money market funds are risk free. Investors in money market funds are exposed to a number of risks, which can result in real (and, in extreme situations, even nominal) capital losses. The three major risks include negative real interest rates, credit risk and liquidity risk.

“Inflation is the primary reason why money markets are not suited to individuals with a long-term horizon,” says van Zyl. “Specifically, if the rate of inflation exceeds after-tax interest rates, then the spending power of your money will decline over time – this is called negative real interest rates.”

He adds that a money market fund is unable to provide protection from the erosion of capital should policymakers choose to administer negative real interest rates. “If you had, for example, invested in a money market fund in Zimbabwe years ago, you wouldn’t have lost a single Zimbabwean dollar, but you would have lost the entire spending power or real value of your investment.”

The second reason investors may not want to invest in a money market is credit risk.

Money market funds invest in debt instruments. If the issuer of the debt instrument goes bankrupt, investors would likely bear a loss. Some funds, such as the Allan Gray Money Market Fund, try and buffer against this risk through diversification of issuers.

“Lastly, extreme circumstances can heighten liquidity risk. If, for example, a money market fund receives a request for an extremely large withdrawal amounts from its investors, then it may force the fund to sell a type of financial instrument commonly used by money market funds called long-dated paper, which could incur a loss for the fund and its investors.”

While the risks apply mostly to extreme circumstances, such as the financial crisis of 2008, van Zyl says it is important to be aware that money market funds, like all investments, are not entirely without risk.

“If you are worried about the risks of the money market fund you are considering, ask your investment manager how the fund is positioned to deal with them, and what the plan is to protect investors’ capital.

“As always when making a big investment decision regarding your money, consider speaking to an independent financial adviser who can help you make the right decision for your goals and risk appetite,” concludes van Zyl.

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Ottawa announces new funding to combat online child abuse

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Ottawa has announced $22 million in funding to fight online child abuse.

Noting that police-reported incidents of child pornography in Canada increased by 288 per cent between 2010 and 2017, Public Safety Minister Ralph Goodale made the announcement Tuesday.

It follows a London meeting last week that focused on the exploitation of children between Goodale and his counterparts from the United States, Britain, Australia and New Zealand, collectively known as the Five Eyes intelligence group.

Major internet companies, including Facebook, Google and Microsoft, were also at the meeting and agreed to a set of rules the members of the group proposed to remove child pornography from the internet quicker.

On Tuesday, Goodale warned internet companies they had to be better, faster and more open when in comes to fighting child abuse on line.

In this Friday, Jan. 12, 2018 photo, detectives use the Cellebrite system to extract information from cellphones at the State Police facility in Hamilton Township, N.J. “Operation Safety Net,” the results of which were announced in December, netted 79 people suspected of exploiting children. (Thomas P. Costello/Asbury Park Press/Canadian Press)

“If human harm is done, if a child is terrorized for the rest of their life because of what happened to them on the internet, if there are other damages and costs, then maybe the platform that made that possible should bear the financial consequences,” Goodale said.

The government plan includes $2.1 million to intensify engagement with digital industry to develop new tools online and support effective operating principles, $4.9 million for research, public engagement, awareness and collaboration with non-governmental organizations and $15.25 million to internet child exploitation units in provincial and municipal police forces across the country.

Goodale said the strategy recognizes that technology is “increasingly facilitating the easy borderless access to vast volumes of abhorrent images.”

That, he said, makes investigations increasingly complex,

“This is a race where the course is always getting longer and more complicated and advancing into brand new areas that hadn’t been anticipated five years ago or a year ago or even a week ago,” Goodale said.

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Gas prices expected to dip in Ottawa

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If you can wait an extra day to fill up the gas tank, your bank account might thank you.

Roger McKnight of Enpro is predicting a five cent dip in gas prices Wednesday night at midnight.

This comes after a four cent drop this past Friday, just ahead of the August long weekend.

McKnight said the reason for the drop, both last week and this week, is due to comments made by US President Donald Trump. 

He says after the drop, the price will be, on average, 118.9 cents/litre in the Ottawa region.

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Oka asks Ottawa to freeze Mohawk land deal, send RCMP to Kanesatake

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The town of Oka is asking the federal and provincial governments to slap a moratorium on a proposed land grant to the local Mohawk community in Kanesatake and to establish an RCMP detachment on the First Nations territory to deal with illegal cannabis sales outlets.

The requests were contained in two resolutions adopted Tuesday night by the Oka town council.

The administration of Oka Mayor Pascal Quevillon held its first public meeting since the start of the controversy that pitted the town council against the Kanesatake band council over a decision by a local promoter to give local lands to the Mohawk community.

The three resolutions are addressed to Prime Minister Justin Trudeau’s government, Quebec Premier François Legault’s government and the Kanesatake band council led by Grand Chief Serge Otsi Simon.

As each resolution was read into the record, Quevillon stressed that the town of Oka was only looking to live in peaceful cohabitation with the Mohawk community.

The town also called upon Ottawa to establish a consultation process that would take into account the concerns of residents in Oka and  Kanesatake.

Quevillon’s administration also wants access to the plans detailing what lands are at the centre of negotiations between the federal government and the Mohawk community for purchase, suggesting the talks are simply a disguised form of expropriation.

“They’re giving money to (the Mohawks) to buy our land and annex it to their territory,” Quevillon said.

Despite its demands, the Oka council adopted an official statement addressed to the Kanesatake band council saying the town’s population wanted dialogue and peaceful cohabitation, with Quevillon citing the 300 years of close links between the two communities.

During the council meeting’s question period, some residents suggested that the council deal with other groups that say they are speaking for Kanesatake, including Mohawk traditionalists. Mayor Quevillon replied that the town would only deal with the band council and did so out of respect for Grand Chief Simon.

The mayor also argued that the RCMP, a federal police force, was best suited to be deployed in Kanesatake, where it would ensure the law would be respected, particularly on the issue of illegal cannabis shops.

Quevillon contended such a deployment was the only way for both communities to work together toward their mutual economic development.

Meanwhile, the apology Grand Chief Simon has said he is expecting from Quevillon for remarks he made earlier this summer about the Mohawk community in Kanesatake does not appear to be coming any time soon.

Asked by a resident if he would apologize, Quevillon left the answer to those citizens who attended the meeting, the vast majority of whom replied, “no.”

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