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- A money market fund (MMF) is a professionally managed, diversified investment vehicle designed to meet short-term cash-management needs or serve as a lower-risk alternative to the volatility of stocks or longer-term bonds. MMFs consist of highly liquid, high-quality money market instruments with the primary objective of providing current income, consistent with liquidity and stability of principal. They offer investors easy access to their cash (same day or next day) and the potential for market-rate income through investments in high-quality short-term debt securities.
- Outside the United States, the Money Market Fund Regulations group funds into two categories: Short-term MMFs or Standard MMFs. Each invests in debt securities that are lower risk and liquid. Short-term MMFs have shorter-dated maturity, life, and term requirements than Standard MMFs and are therefore suitable for short-term operating cash, making them more suitable for cash investors looking for an alternative to fixed-rate time deposits. Standard MMFs are suitable for reserve or strategic cash, which has a slightly longer investment time horizon.
- MMFs can be a valuable addition to your portfolio, whether you use your cash daily or invest it for the longer term. MMFs can offer a competitive yield while providing a liquid, diversified, and high-quality investment. Investors benefit from easy access to their cash, with withdrawals available the same or next business day, and enjoy the lower levels of risk associated with these funds. Managed by experienced investment professionals, MMFs navigate changing market environments to help you maximise the potential of your cash.
What is a money market fund?
A money market fund (MMF) is a professionally managed, diversified investment vehicle designed to meet short-term cash-management needs or serve as a lower-risk alternative to the volatility of stocks or longer-term bonds. MMFs consist of highly liquid, high-quality money market instruments with the primary objective of providing current income, consistent with liquidity and stability of principal. They offer investors easy access to their cash (same day or next day) and the potential for market-rate income through investments in highquality short-term debt securities.
Who uses money market funds?
- Banks, corporations, financial entities, treasurers, insurers, local authorities, charities, universities: To manage short-term cash needs or as a lower-risk investment during market volatility.
- Individual investors: To keep cash liquid for emergencies or near-term purchases.
- Institutional investors: To add stability to an overall investment portfolio.
- Portfolio managers: To use as a “cash” allocation within longer duration portfolios.
Why use money market funds?
- Liquidity: MMFs provide easy access to cash, with withdrawals available the same or next business day.
- Stability: They aim to offer a stable investment option, managed by experienced professionals who navigate changing market environments.
- Current income: MMFs can benefit from managed exposure to the yield curve, offering competitive yields through investments in high-quality, short-term debt securities.
- Diversification: MMFs invest in a variety of short-term
debt instruments, spreading risk across different issuers and sectors, which can help mitigate the impact of any single investment’s poor performance.
MMFs are suitable for those with a short investment horizon, low tolerance for volatility, or a need for highly liquid investment options. They can also provide liquidity and lowerrisk options within a diverse investment portfolio.
Types of money market funds and what they buy
Outside the United States, the Money Market Fund Regulations group funds into two categories: Short-term MMFs or standard MMFs. Each invests in debt securities that are lower risk and liquid.
Short-term MMFs have shorter-dated maturity, life, and term requirements than standard MMFs and are therefore suitable for short-term operating cash, making them more suitable for cash investors looking for an alternative to fixed-rate time deposits.
Standard MMFs are suitable for reserve or strategic cash, which has a slightly longer investment time horizon.
Potential risks and rewards of money market funds
Rewards
Safety: MMFs are generally considered the lowest risk asset class for investors because they are short-term, high-quality investments.
Liquidity: Due to liquidity requirements, and their short-term duration, MMFs can provide daily access to an investor’s cash when they want to redeem shares.
Income: Dividends and yields on MMFs are correlated to current market rates (minus fund expenses) and can be accrued daily, paid monthly.
Stability of principal: Stability of principal is a key goal of MMFs. Because of the strict requirements for investment quality, short
investment maturities within a highly diversified portfolio, MMFs have historically provided strong preservation of principal to investors.
Risks
Loss of principal: MMFs are investments and are not guaranteed.
Credit: Credit risk refers to the creditworthiness of a bond issuer and its expected ability to repay its debt.
Interest rate: MMFs, while considered low risk investments, are sensitive to moves in market rates and therefore have interest rate risk.
Interest rate risk is the potential for losses in investment value caused by upward moves in market rates.
Government vs prime money market funds
Government MMFs invest primarily in government securities such as treasury bills, government bonds, and repurchase agreements collateralised by these securities. They are highly liquid and carry minimal credit risk, making them attractive to conservative investors. Prime MMFs invest in a broader range of short-term, high-quality debt securities, including commercial paper, certificates of deposit, and corporate bonds. These funds offer higher yields compared to government MMFs but come with slightly higher credit risk.
CNAV, LVNAV, and VNAV
All European and UK MMFs must be valued using one of three methodologies: CNAV, LVNAV and VNAV. Each methodology is designed to cater to different risk and return profiles, each offering unique features and benefits.
Money Market Funds Regulation (MMFR)
UK-domiciled MMFs are governed by UK Law and subject to UK MMFR, while European-domiciled MMFs are governed by EU Law and subject to EU MMFR.¹ These regimes are similar in their controls and limitations on MMFs, though are not identical, having diverged since the UK’s departure from the EU. MMFs in both the UK and EU can be structured to be compliant with
local UCITS rules.
Put your cash to work in a money market fund
MMFs can be a valuable addition to your portfolio, whether you use your cash daily or invest it for the longer term. MMFs can offer a competitive yield while providing a liquid, diversified, and high-quality investment. Investors benefit from easy access to their cash, with withdrawals available the same or next business day, and enjoy the lower levels of risk associated with these funds. Managed by experienced
investment professionals, MMFs navigate changing market environments to help you maximise the potential of your cash.
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1 EU MMF Regulation – EU Regulation 2017/1131 on money market funds and all implementing legislation and regulation (as amended). UK MMF Regulation – EU MMF Regulation as it had effect on 31 December 2020 as incorporated into UK domestic law by the EUWA and amended by The Money Market Funds (Amendment) (EU Exit) Regulations 2019 (as amended by the Financial Services (Miscellaneous) (Amendment) (EU Exit) (No.3) Regulations 2019/1390) and the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019.
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