Money market funds as a cash instrument in the marketplace compared to deposit products make a whole lot of sense because they are market rates. So they reflect the market’s rates. And generally speaking, deposit products within a bank reflect what is a trend in market rates.
They might go up if the market rates are going up. They might go down if market rates are going down. But they are not going to reflect the current level of interest rates in the market, which is exactly what a money market fund does.
So as such, they provide a margin, a nice margin to the banks that are offering those deposit rates. So it’s generally a retail concept. It’s something that from a consumer perspective makes a whole lot of sense for them to compare against deposits and ultimately choose the money market fund.
So when you think of a money market fund in the context of a long-term portfolio allocation cash is always a portion of that allocation. Sometimes it’s at a 5% position. Sometimes it’s at a 20% position.
But it’s always there. And it really reflects a choice of whether you want the higher risk in the portfolio to a larger degree because that’s ultimately what your outlook is from a market perspective.
And this can be the longer-term fixed income market, the equity market, the property market, whatever your other choices are, but those that are clearly more risky and generally provide a better market return.
But the cash is the cushion that on an allocation basis allows the risk in those other portfolio types to either grow or to recede depending upon what the overall outlook from the firm or the manager would be.
