Whether you want to build your emergency fund, or save up for a short-term goal, you may look to fixed deposits or even just keep your money in cash, but have you ever considered a money market fund? Money market funds are a great option to manage and earn a return on your cash reserves without the hassle of locking them up. Here, we’ll dive into what a money market fund is, and why you may not have heard of money market funds before.
A money market fund invests in highly liquid, and short-term cash equivalent instruments, commonly known as “money market instruments”. Banks issue money market instruments, such as commercial papers, as a way to shore up short-term cash to make up for its daily deposit reserve shortfall. In other words, by buying money market instruments, money market funds are effectively lending money to banks. These instruments are considered low-risk because they’re backed by the banks, and are highly liquid and short-term.
In addition to investing in money market instruments, a money market fund also holds fixed deposits from banks as another way to earn a return. Not only do money market funds have a network of banks that they can tap into to find the best rates but these funds also have higher negotiating power than retail investors as they can place large amounts of money, often up to a few hundred million Ringgit, with the banks.
As money market funds manage a large sum of money and need to remain liquid, they regularly harvest matured fixed deposits and place new funds into new fixed deposits. By regularly redeeming matured fixed deposits, you can earn a similar rate to fixed deposits through a money market fund without having to lock up your funds.
The money market isn’t directly accessible to retail investors because of the large amount of money that moves in that market on a daily basis. But by investing in a money market fund, you can get exposure to the money market.
Money market funds are a reliable financial option to manage cash, yet the typical Malaysian investor doesn’t know about these funds, and so opts to place his or her cash reserves in savings accounts and fixed deposits instead.
Why are those products more prominent than money market funds?
Simply put, banks really want you to put your money in fixed deposits. With fixed deposits, the lock-up helps banks manage their capital better for lending purposes. Theoretically, if you placed RM100,000 as a fixed deposit for 3 months, a bank can use any portion of that RM100,000 as loans for the next 3 months, yielding more profit for the bank through the interest charged on those loans. But, with a money market fund, a bank loses the opportunity to fully leverage your deposits.
In addition, banks and fund managers don’t heavily advertise money market funds because these institutions earn too little profit from money market funds. Money market funds are an investment product and banks charge management fees on money market funds just as any other investment product that the banks offer. But, management fees for a money market fund range from 0.25 to 0.35% per annum, which is extremely low compared to other investment products that range from 1% to 2% per annum.
Money market funds also tend not to have any sales charges since any fees would greatly impact returns. Since sales charges are non-existent, banks’ relationship managers and agents aren’t incentivised to recommend these funds to you if you’re looking to manage your idle cash (and they might even recommend that you put your cash reserves in investment vehicles that aren’t suited for cash management!).
Money market funds represent around 20% of invested assets in Malaysia, but they’re still an underutilised asset class among individual investors, in part because banks don’t promote money market funds to people for people to even know about them.