As you go along your investing journey, you’re likely to research about and perhaps get advice to look into the Money Market space.
The reasons could vary, from graduating from deposits to earning a little while staying liquid, to utilizing part of your emergency fund efficiently, or better yet, temporarily parking your funds before finally investing it elsewhere.
But what is the Money Market? Should you invest in it and how would you do it? Keep reading to find the answers to these and more.
What the Money Market is
It is one of the many markets investors can put their money in with the hopes of eventually gaining more – like the bond market, the stock market and the property market.
The Money Market is the term used to refer to the buying and selling of short-term debt securities, whose maturity is usually less than 1 year. These include overnight reserves and commercial paper.
The investment products here are considered cash equivalents, because their high liquidity means that they’re as good as cash.
Most of the action seen in the Money Market is made by large institutions such as banks and investment companies. Trades are done at a large scale with large amounts of money involved.
Why you might want to invest in it
The Money Market is characterized by high liquidity, low risk and low reward potential. This means that investing in Money Market instruments allows you to earn a little while still being able to quickly access your money in case you suddenly need it.
For example, if you don’t have an immediate use for the cash component of your portfolio, you could consider putting it in the Money Market while you look (or wait) for opportunities with higher-earning investment instruments.
And since it’s fairly easy to liquidate, you may also think of putting all, or just a portion of your emergency fund there.
The high liquidity of Money Market instruments is the main reason that doing either or both is feasible. After all, if you have to use that money, you’ll be able to get it quickly and without the risk of losing much value.
How to invest in it
Investing directly in the Money Market can be difficult for individuals, given the scale of the transactions.
That’s why doing it indirectly through a pooled fund that focuses on it (like a Money Market Unit Investment Trust Fund or UITF) is much easier, especially if you’re a beginner or don’t have a large amount of capital.
These also have the advantage of being diversified to reduce risk, and are run by expert managers who devote their time to helping the funds grow.