HOW DO WE CHOOSE A MONEY MARKET FUND?
In the previous article, the fundamentals of a money market fund is introduced. This time, we look at a few criteria (shown below) to select one of them.
One quick way to access information is through a money market fund factsheet. This can easily be found an online unit trust distribution platform such as www.fundsupermart.com or through IMAS’s www.fundsingapore.com website.
Size of the fund
The larger the fund, the better its liquidity. With a large asset size, the fund manager has the flexibility to deal with a sudden redemption of investors’ proceeds. The downside of managing a big pool of assets is that the fund manager might have more difficulty in reinvesting the capital since the SGD securities market is still relatively small versus other developed financial markets (e.g. the US and Europe). Funds with an AUM of at least S$200 million would be a good starting point.
A well-established investment fund manager combined with a large asset pool would probably have a wide access of bank brokers to purchase their underlying securities from (debt securities are traded over-the-counter through broker-dealers). A deep-pocket manager would find it easier to bid for securities at a cheaper pricing or even securities which are not available to other fund managers (financial institutions might privately approach large funds when they need to issue debt securities such as certificate of deposits in order to seek additional funding sources).
Weighted Average Maturity (WAM)
This determines the average length of the underlying securities before they mature. A lower WAM implies better liquidity management for the fund manager. Between 90-100 days would be a good starting point.
The Net Asset Value (NAV) of a money market fund should either be stable or increasing over the long term. An NAV which sees a decline could either show that some of the underlying securities might have been impaired or the fund might be forced to redeem its underlying securities at a discounted price.
Rate of Return
Of course, the most important is the rate of return on your capital. A quick way to compare is to use the 1-year return against the 1-month fixed deposit and current account deposit rates. Remember, money market funds are usually able to withdraw with a few days.
Value In Action
A money market fund should serve its purpose as a cash management tool which helps to maintain liquidity and principal of the capital invested. One should always be cautious if a money market fund tries to invest in various structured products which might entail much higher risks to your capital.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie doesn’t own shares in any companies mentioned above.