If It Ain’t Broke, Don’t ‘Fix’ It

The Difference Between a Fixed-term Deposit & Money Market Account

By Jordan Toy

With an abundance of industry jargon out there, understanding your financial investment options can be a complicated affair to say the least. Predictions that interest rates are expected to rise until at least early next year (2023) means we’ll see a hike in most products and services, but stress not!

We’re here to impart possible solutions that can make your Rands stretch further by investing in a Fixed-term Deposit Investment or Money Market Account.

Let’s differentiate between the two and understand the pros and cons of each investment option to help make your choice that much easier.

Fixed-Term Deposit Account (FTD):

What is a Fixed-term Deposit?

A fixed-term deposit is a savings account where you invest a lump sum of your hard-earned funds with a fixed interest rate over a set duration, usually long-term. Depending on your service provider, you can select a duration period between 3 months – 5 years with the option of withdrawing the interest earned or reinvesting at a new rate once your duration period is at a close.

The Pros:

  • A fixed-term deposit account gives the investor certainty upfront of what the interest rate earnings will be over the entire duration- great for planning and peace of mind.
  • You’ll always get the fixed return rate per your agreement, regardless of unstable inflation rates or economic disruption.
  • Most institutes allow you to have the option of withdrawing your interest earned or reinvesting it back into your FDT account. Shap shap!

The Cons:

  • Your money is completely inaccessible during your investment period. Once you have locked your funds into a Fixed-Term Deposit, it’s unlikely you’ll be able to get access to them before the duration period ends. In exceptional cases, some institutes allow early withdrawal that comes with a termination fee, and usually under special circumstances only (i.e. critical illness diagnosis).
  • If interest rates do rise after you’ve already invested in an FTD, you may be losing out as you could’ve locked your money away for the same duration but at a potentially higher rate. For example, you opened a FTD account for a 12 month duration at 7% in July and after the Monetary Policy Meeting in September it is decided that the interest rate will see an increase of 0.5%, you will not benefit from this. Instead of potentially getting 7.5% interest over your 12-month period, you’re now only getting 7% interest due to the lock-in rate. This is something to consider when making your decision, do you want safety or opportunity?
  • It’s unlikely that you’ll be able to add addition funds to your account after the initial investment is made.
  • Most FTD products have a minimum investment amount; be sure to check the minimum lump sum before committing.
  • Whether you withdraw the interest earned or decide to reinvest it, you are still liable to pay tax on the interest earned in that financial year.

Money Market Account (MMA):

What is a Money Market Account:

  • A Money Market account is a market where banks or credit unions raise money by getting short-term loans from investors such as yourself or large institutions. The Money Market can be viewed as a market for short-term loans offering higher interest rates than most savings accounts, based on a short-term agreement, usually 12 months or less. The entirety of the loan is usually a large lump sum (above R1m). Whilst understanding that the average investor doesn’t have access to this kind of outlay, money market unit trusts were created requiring smaller minimum investments, allowing multiple investors to be exposed to a broader portfolio that they otherwise wouldn’t be able to access.

The Pros:

  • MMA’s are generally considered low-risk due to exposure across multiple large institutions, thus lowering risk exposure. A short-term duration also contributes to a lower-risk investment than long-term agreements.
  • Temporarily housing your savings in an MMA allows for higher interest than most savings accounts and gives you access to your funds whenever you need it.
  • As your money is distributed amongst more loan options, your returns will more closely align with the prevailing interest rate, meaning you could get more bang for your buck versus most other savings accounts.

The Cons:

  • Inflation. The ultimate gripe of this particular investment. A Money Market Account is unlikely to outperform inflation over a long-term period.
  • As with an FTD, you are liable to pay tax on the interest earned over that financial year (insert eye roll here).

So, What’s Better?

Depending on your goals and requirements, it’s essential to look at the bigger picture. For example, if you lock in your Fixed-Term Deposit at a lower interest rate for the next 5 years, you could miss out on the opportunity to gain higher interest over that period through a Money Market Account where the interest rate adjusts over time. But, unlike the Money Market Account, an FTD provides greater security, safety, and peace of mind knowing exactly how much you’ll be withdrawing once your investment term ends.

On the other side of the proverbial coin (See what we did there?), a Money Market Account allows easy access to your money and is also considered low risk. Still, it is directed towards short-term investment as it’s unlikely to beat inflation over a long period.

In a nutshell:

Fixed-term Deposit: Money Market Account:
Longer-term Short-term
Fixed interest rate Potentially higher interest rate over a short duration
Money is inaccessible until the full investment period is completed Money is available at any time
Minimum investment amount required Unlikely to beat inflation over a long period

If you think that either of these products could work for you, or if you’d like some more information, reach out to us and we’ll happily assist. Contact us on;

+27 79 889 5046