The very basic of money market instruments available to the investor are fixed deposits. These are funds that are invested for a specific period of time. Generally in Zimbabwe the minimum investment period for any new deposit is 7days. There is no limit on the maximum number of days these funds can be invested for. Interest is accrued. Depending on the market conditions sometimes interest is higher on longer durations awhile at other times interest is higher on short term. It is important to understand the direction and trends of interest rates. If the interest rates are close to the peak its better to invest long duration so that you benefit from the higher rates while prevailing rates have gone down. When the rates are going up you want to place short term investments so that you gain from the rising interest rate trend. Remember these are fixed deposits with fixed interest rates during the tenor of the investment. One thing I learnt the hard way was that never allow for automatic roll overs because the bank will give you a lower interest rate than you could get if you negotiated at the reinvestment stage. Be willing to negotiate. If you have used a single broker for a longer period of time make sure you check prevailing market rates so that you remain current or else once the broker or banker thinks that they are assured of your deposits then they will not give you the better rates. Always negotiate your rates because they are not cast in stone. In terms of fixed deposits you generally can get higher rates from merchant (investment) banks and discount houses rather than from commercial banks. This is mainly because fixed deposits and most money market instruments are the major way these institution can mobilize deposits onto their books. On the other hand commercial banks are generally not desperate for deposits because they get cheap deposits from savings and current accounts.
Since these are fixed deposits the maturity amount is only payable at the end of the period of investment. One has to be careful with his cashflow planning when investing in fixed deposits because a penalty of up to maximum of accrued interest to date is levied on fixed deposits terminated before maturity.
The minimum investment amounts are at the discretion of the financial institution. However the higher the deposit the higher the returns that you can negotiate. In negotiating remember that frequent deposits should be viewed as a positive and so use that to negotiate higher rates.
On maturity, the client can take one of these actions:
1. Withdraw the full maturity amount
2. Redeem the maturity in part and re-invest the balance at prevailing market rates
3. Re-invest the full maturity amount at the prevailing market rates
Fixed deposits are ideal when you are sitting on some cash which you will need within a short period of time. Our investment portfolio has benefited from the use of these instruments at strategic times.
Like any other money market instruments the following applies:
- Returns depend on money supply as indicated by opening and closing positions (information available from RBZ, banks, local press)
- Demand and supply of money is determined by various factors such as tax payments (quarterly, semi-annually), salaries (month-ends), government expenditure, bank-runs, inflation etc.
However, the price of money is governed by:
- the required rate of return;
- the underlying asset