Money Market Fund: What is it and how does it work?
If you started investing a while ago, chances are you have come across the term “ money market fund ” or “ Money Market Fund ”. But what exactly this means is not always clear. In this blog we will discuss what a money market fund is and how it works.
What is a money market fund?
The terms money market fund and Money Market Fund, abbreviated MMF, are often used interchangeably. This sometimes causes confusion about the differences. However, there are no such differences. The term money market fund is merely the translation of Money Market Fund and is therefore exactly the same.
But what exactly is a money market fund? A money market fund is a low-risk investment fund . Its goal is to achieve a stable return, taking as little risk as possible and striving for the greatest possible liquidity . Technically, it can be compared to interbank interest.
How does a money market fund work?
The aim of an MMF is to achieve returns without taking much risk and to have high liquidity. But how is this aim pursued? A money market fund invests mainly in short-term securities of high quality. Think of short-term government bonds . By investing in short-term securities, liquidity remains high and by investing in creditworthy actors, risk is limited.
The return of a money market fund
A money market fund wants to achieve a stable return. The level of this return is comparable to the interbank rate. In Europe the Euribor.
The level of the interbank rate is in fact what you get from the bank as interest on your savings. The return of a money market fund is not exactly the same as this interest, but it is a good indication of the stable return that a money market fund strives for. The return of money market funds is often slightly higher than the interest on savings accounts. This is because money market funds also involve more risk than simply leaving your money in the savings account.
Money market funds are riskier than savings accounts because a money market fund is not covered by the deposit guarantee scheme.
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Can any investment fund simply call itself a money market fund? The short answer: no. A fund must comply with the rules set by the European Union. For example, the average remaining term must be a maximum of 120 days and the weighted average remaining term to the interest rate revision date must be a maximum of 60 days.
A money market fund must also always belong to the lowest risk category.
Money market fund as an alternative to bank deposits
A money market fund is often used as an alternative to a bank account, given the stable returns and low risks.
Money Market Funds: The Pros and Cons
Money market funds have both advantages and disadvantages. Below we list them for you. The advantages of money market funds:
- Money market funds generally offer higher returns than savings accounts.
- Money market funds have a low risk profile compared to other investments.
A money market fund is liquid and therefore advantageous if you only want to invest for a short period of time.
The disadvantages:
- Despite the low risk, a money market fund is not without risk. A money market fund is not insured. Loss on investment is therefore still possible.