Investing in money market funds
How to invest in money market funds
Money market funds, often referred to as cash equivalent funds in Canada, can be purchased through an online brokerage account, such as TD Direct Investing.
When to invest in money market funds?
Money market funds can be an attractive option in high-interest rate environments, for anyone who is saving for short-term goals or biding their time while mulling other opportunities.
Special Considerations
SEC regulations
Under U.S. Securities and Exchange Commission (SEC) provisions, U.S. money market funds are required to primarily invest in top-rated debt instruments and should have a maturity period that does not exceed 13 months. A fund’s portfolio must also maintain a weighted average maturity period of 60 days or less to ensure that only highly liquid debt instruments are included. This aims to prevent investor money from losing liquidity by being tied up in instruments with longer maturities. Money market funds are also prohibited from investing more than 5% of their capital with any one issuer, although repurchase agreements and government-issued assets can be exempt from this stipulation.
Role of credit rating agencies
Credit rating agencies can be invaluable when deciding where to park your money because they consider a unique set of criteria that is specific to money market funds. This can include an assessment of the composition of a portfolio, the quality of the assets it contains and the operational and legal framework that governs it. Credit rating agencies also evaluate each fund on its ability to preserve investor funds and provide liquidity.
Recent regulatory changes
In July 2023, the SEC implemented a change that requires U.S. money market funds to charge a mandatory liquidity fee if their daily net redemptions exceed 5% of the fund’s net assets (unless their liquidity costs are negligible). This move was intended to make it less likely that investors will rapidly withdraw their funds in times of economic uncertainty.
FAQs
Are money market funds low risk investments?
Money market funds are considered very low risk because they deal in high-quality, highly liquid assets. Although they are not insured by the CDIC, they are considered a low-risk investment to store your savings because they’ve rarely lost money.
How do money market funds differ from savings accounts?
Money market funds are a type of mutual fund that invests in low-risk securities while striving to achieve a net asset value (often $1 or $10 per share) before paying out interest as dividends. They tend to have higher yields and no limit on monthly withdrawals, but are not covered by the CDIC and can be subject to management fees. Savings accounts, on the other hand, include CDIC insurance and have no management fees, but often carry lower interest rates and limit the number of monthly withdrawals.
What is the typical minimum investment requirement for money market funds?
The minimum investment on money market funds in Canada can range from $100 all the way to $5,000, although subsequent investments can be lower.
Do money market funds provide competitive returns?
Money market funds can be an attractive option for short-term investors in high-interest environments, but the returns may not be as attractive as what you might get from another type of investment like a mutual fund, exchange-traded fund or other low-risk investments like a guaranteed investment certificate.
How liquid are money market funds?
Money market funds are highly liquid by nature, making it easy for investors to withdraw their money in a matter of days.
How often do money market funds pay dividends?
Money market funds generally pay out dividends on a monthly basis.
Can I use money market funds as a part of my emergency fund?
The highly liquid, low-risk nature of money market funds make them suitable for an emergency fund. Their stated aim is to preserve capital and provide regular interest payments.
What are the fees associated with money market funds?
Depending on the exact nature of the fund, investors can expect to pay management fees and, in rare economically turbulent cases, a liquidity fee upon withdrawal of money.
Is there a difference between a money market fund and a money market account?
Yes. A money market fund is an investment that you buy or sell that does not include insurance on your principal. A money market account is a type of interest-earning savings account offered to businesses in Canada (they are not available to individual investors, as they are in the United States). Another key difference is the yield: Money market funds offer a fixed rate, whereas money market accounts provide a variable yield.
