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Money Market Funds can be a good investment option if you’re looking for a low-risk and relatively affordable way to grow your money.
Should you invest in this type of pooled fund? Understand first how it works and the possible pros and cons of putting your money into this kind of instrument.
How does a money market fund work?
The Money Market refers to the trading of investment instruments that are considered as good as cash because of their high liquidity. Examples include short-term debt securities issued by corporations or government entities.
Money market instruments are usually traded in large volumes with huge amounts of money involved. That’s why they’re mainly bought and sold by institutions like banks and investment companies.
A Money Market Fund is a type of managed fund – like a mutual fund or Unit Investment Trust Fund (UITF) – that makes investing in the money market more accessible and affordable to individual investors.
This fund pools together the money of many people to invest in money market instruments as guided by the fund's investment objectives.
Should you invest in a Money Market Fund?
A Money Market Fund is worth considering if you want to invest in a low-risk option with the potential to earn better than a regular savings account.
Potential advantages of investing in Money Market Funds
Here are a few reasons why a Money Market Fund might be a good addition to your portfolio:
- Low risk
This type of fund is suitable for investors with a Conservative risk profile as they tend to have low volatility. This means there’s a low possibility of getting significantly less money than you invested.
- Highly liquid
It’s generally quick and easy to convert your money market fund investment into cash whenever you need to. You may be able get your money within 1 business day after redeeming from such a fund.
- Relatively affordable
Pooled funds make investing more affordable for individual investors as the minimum initial investment is only P1,000 for some providers.
Pooling capital is especially helpful for the money market space where trading is done in large quantities.
Potential limitations of investing in Money Market Funds
On the flipside, there are a few limitations you should know about to help you decide if this fund is right for you.
- Modest returns
Considering the low-risk nature of Money Market Funds, the growth potential is also comparatively low with this vehicle.
Managed funds also collect certain charges like trust fees that may eat into your earnings.
- Investing risks
While money market instruments are low-risk, there’s no guarantee your investment will increase in value due to many factors that affect prices like changing economic conditions.
Additionally, pooled funds aren’t covered by deposit insurance, unlike savings accounts.
Still, this product may have a place in your portfolio if you’re looking for a safe place to park your cash in times of market volatility, or while waiting for a good opportunity to invest in other assets.
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