What it means
Banks that manage trust accounts and pension funds often hold large amounts of cash waiting to be invested or paid out. Leaving it idle earns nothing, so they place it in a STIF.
The fund pools money from many accounts and invests it in assets such as treasury bills, bank deposits, commercial paper and repurchase agreements. Every instrument in a STIF matures quickly, often within days, weeks or months.
This keeps the fund liquid, so investors can withdraw money easily, and limits sensitivity to interest rate changes. Most STIFs aim for a stable unit value of $1.00, with income paid as extra units or cash.
STIFs are typically available only to the bank's own trust and fiduciary clients rather than to the general public. They are usually regulated as bank collective funds and not as registered mutual funds, so rules and disclosures differ.
That is why they are commonly used by institutions, such as pension plans and charities, and rarely by individuals. Finance teams value STIFs as a cash management tool.
They earn a better return than a typical bank current account, and funds can be moved in and out with little delay. They also serve as a parking place for cash between investment decisions.
The nuance is that stable does not mean guaranteed. A STIF is not insured like a bank deposit, and in times of market stress there have been cases where short-term funds struggled to maintain a stable unit value.
Investors should look at the quality of the underlying assets, the average maturity and the sponsor's track record. In practice a treasury team will set a policy for how much cash goes into a STIF and how much stays in bank accounts for day-to-day payments.
A common approach is to keep enough in the bank for a few weeks of expected outflows and place the surplus in the fund. Reviewing the policy each year keeps the balance between yield and access sensible.
In practice
Real-world examples.
Example
A pension plan receives $15,000,000 of employer contributions on the last day of the month. Its manager places the cash in a STIF for three weeks while a committee decides how to invest it. The money earns interest and remains available when the decision is made.
Example
A university endowment holds $6,000,000 ready to pay the next quarter's scholarships and building bills. The finance office keeps it in a STIF to earn a yield higher than the bank's current account. Each week the office withdraws the amount needed to pay suppliers.
Example
A corporate treasurer is offered a STIF by the bank that manages the company's retirement plan. She compares it with a money market fund on yield, fees and asset quality, and notes that the STIF is open only to plan assets. She uses it for the plan and a money market fund for company cash. The comparison table she prepares is added to the treasury policy file for the auditors.
Formula
Calculation
Daily interest = balance x annual yield / 365
Suppose a charity holds $7,300,000 in a STIF with an annual yield of 5%. Annual interest is 7,300,000 x 5% = $365,000. Daily interest is 365,000 / 365 = $1,000. Over a 30-day month, the fund would earn about 30 x 1,000 = $30,000, and the unit price would remain at $1.00 with the interest credited as extra units.Case study
Seen in the real world.
Ashgrove Trust is an illustrative, fictional bank trust department that managed $400,000,000 of client cash across hundreds of accounts. Most of the money sat in a general bank account earning very little.
The department created a STIF holding treasury bills, bank deposits and repurchase agreements with an average maturity of 30 days. Clients' cash moved into the fund each night, and interest accrued daily.
At a yield of 4% instead of 0.5%, the extra income on $400,000,000 came to 400,000,000 x 3.5% = $14,000,000 a year. The illustrative lesson is that even a simple, low-risk fund can add real value when large balances would otherwise sit idle.
Watch out
Common mistakes.
- Assuming a STIF is insured like a bank deposit, when it is an investment and carries some risk.
- Believing the $1.00 unit value is a guarantee, when it is a target supported by the quality and short maturity of the holdings.
- Treating a STIF as identical to a money market fund, when regulation, access and disclosure rules differ.
Questions
People also ask.
Who can invest in a STIF?
Usually the bank's trust and fiduciary clients, such as pension plans, endowments and foundations, rather than individual retail investors.
What does a STIF invest in?
Short-term, high-quality instruments such as treasury bills, commercial paper, bank deposits and repurchase agreements.
Why would someone choose it over a savings account?
It can offer a higher yield on large balances with quick access to the money.
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