Money Market Funds

What
A money market fnd invests in high quality, short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.

Pros
It is good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 and 2 per cent - than banks' savings deposits. Such funds often have no sales charge, although they come with a low management fee of about 0.5 per cent per year.

Cons
Although most money market securities are considered very low-risk investments, there is a possibility that the borrower will not repay the loan as promised. However, such a default risk becomes non-existent if it is a government bond. Also the interest rate earned usually does not exceed inflation.

Best for
You can use it to park money that you want to keep safe and available for spending in as short a time as a few months to as long as several years. Therefore, it is suitable for all age groups, particularly for retirees.

Still, not all money market funds are the same. When shopping for a money market fund, read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.

Bank Deposits

What
Cash that is deposited in banks to earn interest depending on the account type and tenure.

Pros
It is a liquid asset, easily accessible and earns some interest. In Singapore, deposits are relatively safe as depositors are protected by the Deposit Insurance Scheme - administered by the Singapore Deposit Insurance Corporation - which insures each depositor up to $20,000 per institution they bank with. This covers an individual's Singapore-dollar current, savings and fixed deposit accounts.

The scheme provides depositors with peace of mind and they can expect to be compensated within three weeks of an order by the regulator to pay out from the Deposit Insurance Fund.

Cons
Bank deposits in excess of what is insured by the Deposit Insurance Scheme might be list in a bank run. Also, current bank interest rates, which ranges from 0.2 to 1 per cent, are unattractive. They are also unable to beat inflation, so the monetary value of deposits will diminish over time.

Cash

Pros

This is the most liquid form of financial asset.

Cons
You do not earn any return from holding idle cash. The purchasing value of money diminishes over time because of the effect of inflation.

Investors are encouraged to keep at least six months' worth of expense money to tide them over rainy days.

Best for
Generally, there is no need to keep too much cash because there are other assets like deposits, bonds, stocks and unit trusts that can be liquidated within a short time, with little or no penalty, depending on the prevailing market conditions.

10 Degrees of Risks

It is natural to feel disheartened after a bad experience. Still, even if you are one of the hundreds who lost money in the now-worthless structured products linked to failed United States investment bank, Lehman Brothers, do not go to the other extreme and lose your faith entirely in investment.

Instead, take a hard look at the risks and potential returns of the underlying assets in your portfolio. It is unwise to put all your money under the pillow and in the bank deposits just because they are very secure. Your purchasing power will be reduced by inflation.

A sensible combination of products with varying risks levels can provide good returns. Experts suggested that the most effective way to optimize risk is a globally diversified portfolio of different assets like equities, bonds and commodities.

For those who are confused over the potential risk levels of different asset classes, here is a general guide, from the safest to the riskiest sort of investment available.

1. Cash
2. Bank deposits
3. Money market funds
4. Bonds
5. Unit trusts
6. Equities / Shares
7. Complex structured products
8. Futures
9. Forex trading
10. Hedge funds