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Cash ‘safe-haven’
Investors in search of a safe haven for their cash have been tempted into the UK money market sector. Cautious investors have invested in cash and funds believing them to be totally risk-free, where they are anything but. Apart from institution failure and inflation risk (the inability to actually match inflation returns so your money is actually decreasing in value) which have both always been around. We now have had since 2008 the implication of systemic failure, where the whole system, banks, regulators, and government are placing money at risk.
There are three different risk spectrums:
- Traditional treasury funds - performance is poor. In five years it has failed to keep up with inflation on headline rates, and if taxable, is performing very badly. http://www.nsandi.com/interest-rates/index.jsp
- Building Society type funds – often these provide better returns but only the first £50,000 on deposit is actually secure. Again returns after tax are below inflation. Consider tax efficient investments like Cash-ISA’s to maintain headline returns. The big swindle is often money is put into deposit accounts at one headline rate, only to find that the rates fall 12 or 18 months later
- Money market funds invest across a collection of financial instruments that are supposed to offer low-risk cash-like returns. Typically, these funds hold
term deposits, which are fixed short-term loans to banks or building societies, and commercial paper, which are tradable loans issued by banks. They may also hold asset-backed commercial paper and they may be investing in derivatives linked to these underlying instruments. Funds investing in longer-dated instruments and derivatives are riskier than the traditional money market funds that stick to deposit accounts and high-quality short-term loans.