Is my money safe with Money Market Fund?
Jacob Onyango|Aug. 17, 2019
If you invest, a money market fund takes your money, invests it and sends you part of the earnings in form of monthly interest. But is it safe to put your cash in Money Market Fund?
Before we begin discussing how safe your money is in a money market fund, let’s take a moment and delve into what money market fund is.
A money market fund is a form of a fixed income is a collective investment scheme that pools funds from investors and invests in liquid interest earning instruments.
Money market funds invest in short term government securities like treasury bills, commercial papers and bank deposits.
If you invest, a money market fund takes your money, invests it and sends you part of the earnings in form of monthly interest.
Let us now address the elephant in the room. Is your money safe in a money market fund?
First off the underlying assets for MMF are stable and short term securities which are very low-risk. The shorter the investment period, the safer it is.
In these uncertain economic times, the short maturity period that comes with MMF reduces their exposure to market fluctuations. This makes them stable.
Another safety layer that comes with MMF is the fact that it is publicly traded and regulated by the Capital Markets Authority (CMA) and they have to comply with Capital Markets Act Cap 485A and Capital Markets (Collective Investment Schemes) Regulations 2001.
All MMFs must have a CMA approved fund manager, custodian, trustee and auditor. These four play separate roles in safeguarding your money.
The fund manager’s work is to invest the pool of funds on behalf of the investors.
The custodian, usually a bank, holds the assets under management, which means that the fund manager doesn’t have access to your money but can only issue instructions to the custodian on where to invest.
The trustee governs the fund and holds everyone accountable.
Lastly, the auditor reviews the financial statements of the MMF and tells whether the statements are accurate.
The safety of your money is also assured by the fact that MMFs are very transparent. The rates are published daily, giving you a chance to view how your funds are performing. This enables you to track the performance of your invested money.
A further security associated with money market funds is the ease of access to funds. MMFs are liquid because account deposits are available for immediate withdrawal. As soon as you notify you fund manager of withdrawal, your cash should hit your account within three to five business days.
Moreover, you will not lose any interest when you liquidate your accounts. Most fund managers actually allow one free withdrawal every month. I don’t know if that does it for you cause it sure makes me trust money market funds more.
I am sure you are familiar with the phrase ‘Don’t put all your eggs in one basket.’ In line with this, money market funds have a diversified portfolio. Fund managers in a MMF can access a broader range of securities, which minimizes risk of loss by spreading it.
If one investment performs poorly, another may perform better thus absorbing the loss. Many baskets indeed.
If you are thinking of investing in a money market fund, I hope I have put your doubts to rest. So go ahead and take the first step.