In fact, it can feel like a bit of a minefield and sometimes you may not know if you've made the right choice.
Should you choose a bond fund, equity fund, property fund or a money market cash fund? Or any other type of fund?
So, what is a Money Market fund?
They are essentially unit trusts that aim to provide investors with an income from risk-free, short-term cash and cash-like holdings.
Some investors have been selling their share funds and have opted for security by pouring millions into these types of funds. In our experience, this type of investor will tend not to have a proper risk assessed portfolio, rather a collection of disparate investments, and may be doing it all themselves.
The money manager of their choice will place this money into bank deposits, certificates of deposit*, very short-term fixed interest securities and floating rate notes**.
Most Money Market funds require relatively low minimum investments - typically around £500. They are also quite low-charging, typically with no initial charges and an annual management fee between 0.25% and 0.50%.
So, in short, these funds are cheap, accessible and low risk. In these turbulent investment times, what could be better?
However, if you are paying an annual fee for a Money Market fund, it would be reasonable to expect that the fund manager would beat the return available from conventional, high street savings accounts.
Unfortunately, most Money Market funds aren't performing better than traditional savings accounts!
Just take a look at their track record performance:
1 year - 3.8%
5 Year - 15.7%
10 Year - 41.2%
Put simply, leading savings deposit accounts would do similar or better!
So what is going on here?
The problem is that some funds are taking more risk than others, which drags the averages down. Conventional Money Market funds invest in deposit accounts and short-term, high-quality debt. But, lately, some funds have taken to investing in riskier assets such as lower-grade corporate (company) debt and longer-term loans.
The idea of course is to generate a better return. The downside is that defaults are occurring more frequently and with less liquidity (yet another repercussion of the credit crunch).
As an example, one leading fund has actually produced a negative (-3.9%) return over a year. This is worrying, since these funds are supposed to protect your capital.
So, taking the scope of returns into account, these funds actually seem quite expensive in terms of running charges. What's more, the investment strategy of some funds is hardly low-risk and consequently are all exposed to some degree of market volatility.
In addition, it is difficult to determine the quality of the debt instruments your money is being invested in. US Funds have been feeling the impact of the subprime debt crisis for some time now, with falling interest rates putting pressure on returns. So the question is; will it soon be a similar story in the UK?
Since there are a number of market-leading, easy access savings accounts that are paying interest rates of 6 - 6.5% without any market risk at all, then if you are going to invest in a Money Market Fund, on paper it may NOT be the best option for your money.
* Certificates of deposit = A time deposit (i.e. a deposit with a specified maturity) made at a bank which pays fixed or floating rates of interest. The lender receives a certificate that a deposit has been made which can then be sold in the secondary market whenever cash is needed.
** Floating Rate Notes = Bonds and other debt instruments that carry a variable (i.e. floating) rate of interest, usually linked to a reference rate such as the LIBOR.
# Source: Investment Management Association, IMA. March 2008.
The Financial Tips Bottom Line
We have written many articles on the folly of 'jumping ship' and having no clear investment philosophy.
It really can't be stressed enough - be an investor, not a gambler.
ACTION POINT
If you have a Money Market Fund, review this urgently. Contact your planner or adviser, and ensure you are getting the most from your investments.
However, by far the most important thing you need to know is what you want your end result to be. This is certainly the most important beginner investing or advanced advice you will ever get. Hopefully this stock investment advice will help you to achieve your goals, whatever they may be.
Quite simply, many investors jump into the investment field arena without having a clue for what they want to accomplish through it. It doesn't matter how good of an investor you are-without knowing your final goal, you will never get anywhere with your investments. This would be akin to getting in your car and just starting to drive without knowing your final destination.
Here's your first investing money advice: you need to sit down and map out what you want to accomplish with your investments. Do you want to achieve a 15% annual return? How much money do you want in the bank 1 year from now? How about 5 years from now? 10?
As you think through this, also keep in mind what you plan on doing with this money. Just wanting to make a lot of money will not provide a lot of motivation; however, knowing that you could buy a new house, boat or car with this money will be all the incentive you will need to achieve your financial goals.
Another great price of advice for investing your money is to write out your goals, and place them in an area where you can view them often. It's often been said that the simple act of writing out a goal is enough to help you achieve it.
This evokes one of the greatest laws in the universe, which is attraction. By continually visualizing your end objective, your mind will subconsciously work on ways to help you get there.
Once you know what your financial end will be, now it's time to map out your course for getting there. This will obviously be different for every investor. The two most common investment methods are real estate and stock investing.
Neither way is better than the other; many have made a fortune with each. Your final decision will completely depend on you, your tolerance for risk, and what you want to achieve.
For instance, if all you want is to be able to buy a car in the next 6 months, then you won't want to risk your money with stocks, real estate, or mutual funds. These are long term investments, and should be viewed as such.
Most investors view these vehicles as ways to get in and make a quick buck. Nothing could be further from the truth.
All of the top stock and real estate investors will only invest in a particular investment if they can be sure it will go up for the long term, contrary to popular belief. Most investors want to make a million dollars overnight and this will rarely be the case.
If your goal is to have enough money to purchase a new car in 6 months, then you will want to focus more on short term bonds, or something else that can be assured of going up. This obviously isn't as exciting as real estate or the stock market, but it will be the best method to help you achieve your particular goal.
Remember, it really doesn't matter which method if investing you choose. The best investing money advice that you could ever receive is imply knowing where you want to be at the end of it. Only after deciding on this should you even start to consider which investment to put your money in.
Both Ray Prince & Josh Neumann are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Ray Prince has sinced written about articles on various topics from Finances, Babies and Property Guide. Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Click here fo. Ray Prince's top article generates over 33100 views. to your Favourites.