Learn what money market funds are and why they are a popular option for investors who prefer cash-based investments.
Money market funds are short-term unlisted managed investment schemes structured as open-ended mutual funds. Its underlying assets are usually low to medium risk cash-based investments that offer higher interest rates, such as certificates of deposit (CDs) and other high-interest securities.
A money market fund is one of the prime choices for Australians who prefer cash-based investments since it retains liquidity and minimises risks to the principal investment. It also opens up the opportunity for individual investors to access assets that require a high initial capital.
Here’s a quick guide to money market funds before investing in one.
Money market: accounts versus funds
A typical money market account is accessible only to wholesale investors, such as big institutions and people with large capital. Since the minimum principal investment usually amounts to $500,000, investors with smaller capitals do not usually have enough to invest.
Fund managers have made such accounts more accessible to retail investors through money market funds because most try to maintain a consistent net asset value (NAV) at or close to $1.
Since money market funds are unlisted investments, they are cannot be traded on the Australian Securities Exchange (ASX). However, ASX developed the mFund—a separate platform for unlisted managed funds—where investors may find and enroll in money market funds.
Fund managers, brokers and some banks also offer money market accounts and funds.
Money market fund features
Money market funds have various features that make them attractive to investors, such as:
Accessibility
As mentioned earlier, money market fund assets are usually difficult to access for retail investors because of the high capital requirement. Since fund managers invest in a diverse pool of cash-based and short-term liquid assets, investors are able to diversify and acquire previously inaccessible securities at a more reasonable price.
Liquidity
Money market funds retain liquidity because of the fund’s nature as a short-term investment. Since most funds mature in less than one year, investors don’t have to wait years to receive their capital plus investment returns.
Its open-ended mutual fund structure also allows investors to redeem their investment anytime if they don’t want to wait until maturity.
Diversity
Money market funds are not limited to one type of investment. Managers may combine term deposits, treasury bonds, redeemable dividend-paying shares, callable corporate bonds, hybrids, or any high-interest securities to form the fund.
The only requirements are that the underlying assets must be short-term, pose lower risks, and have higher interest rates.
Risks
Money market funds almost resemble term deposits offered by financial institutions, but investors must understand a few key differences.
The fund is an unlisted managed fund. Money market funds usually provide higher returns even with minimal risks. However, despite active risk management, it can still decrease in value.
There’s no insurance. Unlike term deposits which are insured for up to $250,000, these investments hold no insurance.
This information has been sourced from ASX.
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