Money market fund (MMF) is a type of mutual fund that are invested in short-term fixed income securities such as Treasury bill, Bank deposits, Commercial papers, Asset backed securities and Repurchase agreements. These funds are ideal for individuals as well as corporates, to park their temporary cash surpluses and earn a competitive tax free return. These funds generally provide liquidity similar to saving with a high/good/attractive return. Investors can keep their investments even for a shorter period and earn a return or interests. Investors in this fund are paid or get interest per year. The risk type of this fund is low.
What you need to think about before investing in Money Market Fund?
You may want to use money market fund as an addition to a larger diversified investment portfolio. Before you get started, think about your appetite for risk and also your liquidity needs for regular and upcoming expenses.
How does Money Market Fund work?
Like other Mutual funds, money market funds sell shares to investors who will earn income or interests from the portfolios. Money market fund blend highly-rated short term securities with the longer-dated securities are 90 days and 365 days for most funds. Some Money market funds seek to offer a constant Net Asset Value (NAV) of 1.00 in the respective currency, while other types Money market funds float their Net Asset Value (NAV) to the fourth decimal place. While yield is not a primary objective, Money market fund seek to offer investors the potential for income that approximates the rate on other short-term investments.
Most Money Market funds are required by their respective regulators to maintain sufficient liquidity to meet reasonably foreseeable redemptions. Generally, they must invest at least 10% of their portfolios in assets that can provide daily liquidity, and at least 30% of their portfolios in assets that can provide weekly liquidity although there are exceptions.
To comply with these liquidity requirements, all companies that offer Money Market Fund must consider factors that could affect the strategy’s liquidity needs, which includes market opportunities and shareholder flows. Depending upon the volatility of its cash flows (particularly shareholder redemptions), this may require a fund to maintain greater liquidity that would be required by the daily and weekly minimum liquidity requirements under the respective regulations.
Benefits or advantages of having a money market fund account
Money market fund account may be best suited to investors with short-term investment needs or goals, and they are seeking to protect their principal and to maintain liquidity. Benefits or advantages of Money Market Fund include.
1.Liquidity: Investors may benefit from the pooled liquidity provided by a money market fund which provide or offers daily or anytime access of your invested fund.
2.Preservation of capital: Money market fund ensures that there is preservation of capital by investing in short-term dated, highly-rated securities with the aim minimizing volatility.
3.Diversification: Stringent regulatory and rating agency rules demand maximum counterparty thresholds within money market fund. This ensures diverse exposure across a wider range of short-term debt issuers as opposed highly concentrated balance with a sole counterparty.
4.Operational efficiency: There are multiple ways of accessing money market fund, making it is easy to manage subscriptions and redemptions. Shares remain invested until redeemed so you do not have to continually trade to maintain the exposure as you would go for the traditional banking options such as deposits.
5.Yield: The active management of money market fund allow the dynamic and react to changes in the markets. This can be potential in enhancing yield.
The difference between money market fund and bank deposit
Bank deposits typically aim to provide clients with a location to store their cash for a specified length of time with a specified rate of interests. Money market fund seeks to prioritize maintenance of capital and liquidity, by investing in a broad range of high-credit quality assets across a wide range of issuers. Here is the difference between money market fund and bank deposit.
1.Money Market Fund
Diversification
The pooled funds are invested in multiple field resulting in diversification.
Liquidity
Most money market fund offer the option of you can withdraw your funds anytime you want and there’s no lock up period.
Operational ease
Single transaction which can be executed in various ways. Instruction needed for subsequent redemption and subscription.
Yield
Active management of diversified money market securities allow money market fund to be flexible in positioning for changing market conditions. The risk involved in money market fund is low.
Fees
Fees involved in opening money market fund are affordable and there’s no fixed fees to open a money market fund.
2.Bank deposit
Diversification
Exposure to a single bank counterparty.
Liquidity
Potential penalties for accessing cash prior to maturity of term deposit.
Operational ease
Multiple bi-lateral agreements with banks typically required to achieve laddered and diversified investment. Multiple individual instructions may be required to execute.
Yield
Rates driven by bank funding needs can be volatile.
Fees
Disagreement between client and bank often costs to break term agreements
What you should consider before having a Money Market Fund Account
Money market fund is an efficient cash management solution but there are some important factors to consider before having a money market fund account.
1.Where to get or open a money market fund account.
2.What are the requirement to consider in order to have a money market fund account?
3.Can I open many or different money market fund accounts?
4.Have a goals or targets that want to achieve and for how long will it takes you to achieve these targets and goals
5.Are you familiar to the market rates? If not then you need to read a lot about business, finance, investments and daily trends in market.
6.Type of risk involved in the fund.
7.Are there thresholds around return expectations or loss tolerance?
8.Are there operational preferences or requirements e.g. trading or reporting?
9.After you have open a money market fund always make sure you are doing a follow-up on how your account is doing, and these can be done by monitoring your weekly or monthly statements send to you by the company that you have invested in.
If you want or need a money market fund account or you need further explanation on how to invest just call or text or WhatsApp +254717753553 or 0717753553
