WHAT IS A MONEY MARKET FUND? – PART I

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A money market fund is a type of mutual fund which seeks to invest in short-term, high-quality securities such as government bonds, corporate bonds, certificate of deposits or other highly liquid and relatively low-risk securities.

It was first introduced in the United States during 1971 as an alternative to low-paying deposits. As a result of a high interest rate environment in the early 1980s, money market funds in the US became popular as a form of alternative cash management, since the yield on these funds was substantially higher than what savers could earn on their regulated deposit rates back then. Below is a simple flowchart of how the fund works:

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Characteristics of Money Market Funds

One of the key characteristics found in money market funds is the preservation of capital. Money market fund performance tends to either be stable or increasing. Even though there is no form of capital guaranteed by the money market fund, these funds are typically well-regulated in order to protect investors’ interests. In Singapore, under the Code of the Collective Investment Scheme guideline, “a money market fund should invest at least 90% of its Net Asset Value (NAV) in high quality debt securities and deposits placed with financial institutions. Moreover, the fund may only invest in non-deposit investments with a remaining term to maturity of no longer than 2 years.” This reduces any form of liquidity risks should a sudden net redemption of the fund arises.

Liquidity and profitability are two other advantages of money market funds, especially under a less than optimistic market condition. A well-managed money market fund’s annualized return can be almost as good as a 1-year fixed deposit. Investing in these funds allow a quick withdrawal within a few days. Moreover, annual expenses paid to the investment manager are typically lower as well. The table below shows a few samples of SGD money market funds.

 

Money Market Funds (as at 30 Apr 2014) Currency 1-year return 3-year return
LionGlobal SGD Money Market Fund SGD 0.50% 1.50%
Schroder S$ Reserve Fund SGD 0.10% 0.30%
Phillip Money Market Fund SGD 0.80% 1.50%

Sources: Company Websites and Factsheets

 

Value In Action

A money market fund is a useful tool for any savers or investors who wish to employ a cash management vehicle as an alternative form of savings or a capital transition tool before redeploying their cash for future investments.

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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.