My Money

Olebile Makhupe | Monday May 3, 2010 00:00

Where should my money go...cont'

Last week we explored the different account types offered by banks in Botswana, from the basic current account for handling day-to-day receipts and payments, to interest-bearing accounts such as savings and call accounts.

We will briefly explore other types of basic accounts, which are fairly easy to understand, before discussing how to create a sound budget to keep your financial house in order. We already established that all salaried persons and companies, regardless of size, need a current account to enable payments, and that we all need to save for the 'dreaded' rainy day to take account of unexpected expenditures. Beyond this, we also need investment savings, which allow us to save for acquisition of a liability (for example, saving a deposit for purchase of a car), or acquisition of an asset (saving to invest in shares), or saving for an expenditure such as a holiday.  Available investment instruments range from fixed deposits, to money market funds, unit trusts to the most sophisticated, aimed at more advanced investors. We will later explore how to decide which instrument is relevant for the different investor levels.

Fixed DepositsA fixed deposit entails placing funds with the bank for an agreed period of time, earning a fixed rate of interest for the duration of the deposit. Fixed deposit periods or tenors as they are commonly known, range from a few days to about two years, with flexible maturities in between, say, you can choose to fix funds for one month, six months, nine months and so on. For the duration of the fixed deposit, you will earn an agreed rate of return and will not withdraw the funds; there may be penalties for early withdrawal of funds. Careful consideration needs to go into choosing the fixed deposit tenor, and should include factors such as when the funds will be required, possible movement of rates within the time-frame that funds will be fixed, and penalties charged by the institution in case funds are required as an emergency. The minimum balance required for opening fixed deposit accounts is usually higher than for savings and call accounts.

Unit TrustsUnit trusts allow a management company to pool funds of several small investors, and buy shares from blue chip companies, giving them access to an investment they otherwise could not afford if they invested on their own. Unit trusts reduce the risk of investing in the stock market by pooling your savings with thousands others, then spreading the money across a wide range of shares or other types of investment. Unit trusts are also cost-effective, charging a fraction of what it would cost to invest in a broad basket of shares by yourself. Having a management company also means you have access to professionals to make the investment decisions for you.Various financial institutions such as brokers and money market managers can provide more information on various unit trust portfolios available in Botswana.

Money Market FundsMoney market fund is a type of investment that offers short term instruments that mature in less than 13 months, at a maximum.  These funds have relatively low risk and pay dividends that generally reflects short-term interest rates. Money market funds typically invest in government securities, certificates of deposit, and other low risk instruments that can be easily liquidated, therefore the yield may go up and down depending on which instruments the funds have been invested in. Because of the diversity in these types of investments, it is vital to carefully read all the fund's available information or prospectus, and ensure the fund manager spends time to explain how the returns are calculated. Money market funds are fairly liquid, meaning you can get your money out within a few business days if you need it. Typically, choosing the right type of account should follow the following guidelines:

Current account   -  All salaried individuals and businesses, for day-to-day transactions, allows for unlimited withdrawals, through a cheque book or an ATM withdrawal card. Bill payment can be effected electronically, by card or through your phone (mobile banking).

Savings Accounts - Small, individual investors just starting to save, minimum amounts can be as low as BWP 50.00. Withdrawals slightly less regular than current account

Call Accounts- Typically used by investors of medium sophistication, minimum balances higher than required for savings accounts. Most suitable for companies.

Fixed Deposits- Mostly appropriate for funds that are only required at a future date, appropriate for both individual and corporate investors. Choosing the most appropriate tenor depends on when funds are required and best returns.

Unit Trusts- Allow small investors to access shares they usually couldn't afford if they bought on their own. Ideal for investing funds that will not be required in the immediate future, as short term fluctuations in the price of shares may undermine or erode any capital gains. Investments handled by brokers, fund managers, and sometimes banks.

Money Market Funds- Investors who want a decent return from a relatively safe investment. However, most money market rates are variable, therefore you may not always know upfront how much you'll earn on your investment in the next month. Investments undertaken through money market professionals and brokers.

In the next article, we will cover personal budgeting tips, setting you on your way to being financially savvy !!!

Olebile Makhupe is the Head of Global Markets at Standard Chartered Bank Botswana. For Feedback and contributions please e-mail--mymoney@mmegi.bw