What are Money Market Funds?

Money market funds are a popular investment option for many investors, and they have been around for several decades. In this article, we will explore what money market funds are, how they work, and why they are so popular among investors.

What are Money Market Funds?

Money market funds are a type of mutual fund that invests in short-term, low-risk securities, such as Treasury bills, commercial paper, and certificates of deposit. These funds are designed to provide investors with a safe and low-risk investment option, while also offering a relatively high level of liquidity.

How Do Money Market Funds Work?

Money market funds work by pooling money from investors and using it to purchase a diversified portfolio of short-term securities. These funds are typically managed by professional fund managers who aim to maintain a stable net asset value (NAV) of $1 per share.

Why are Money Market Funds So Popular?

There are several reasons why money market funds are so popular among investors. Firstly, they offer a low-risk investment option, which is especially attractive during times of economic uncertainty. Secondly, they provide a high level of liquidity, allowing investors to easily access their money when needed. Finally, money market funds typically offer higher yields than traditional savings accounts or certificates of deposit, making them an attractive option for investors seeking higher returns on their cash holdings.

Risks and Considerations

While money market funds are generally considered to be low-risk investments, they are not entirely risk-free. Investors should be aware that the NAV of these funds can fluctuate slightly based on changes in interest rates, and that there is a risk of default on some of the underlying securities held by the fund. Additionally, money market funds are not insured by the CDIC or any other government agency, which means that investors could potentially lose money if the fund were to fail.

Investors might choose to use money market funds instead of high interest savings accounts for a few reasons:

• Higher potential returns: Money market funds generally offer higher yields than high interest savings accounts, which means investors may be able to earn more interest on their cash holdings.
• Greater flexibility: Money market funds offer more flexibility than high interest savings accounts in terms of deposit and withdrawal options. Investors can typically buy and sell shares of the fund at any time without penalty, whereas some high interest savings accounts may have restrictions on withdrawals or require minimum balances.
• Professional management: Money market funds are managed by professional fund managers who have expertise in managing short-term investments. This can provide investors with peace of mind that their money is being managed by an experienced professional.
• Diversification: Money market funds typically hold a diversified portfolio of short-term securities, which can help to mitigate risk. High interest savings accounts, on the other hand, are typically FDIC-insured and hold cash deposits, which may not provide the same level of diversification.

Here is a list of the most popular money market funds in Canada:

1. RBC Canadian Money Market Fund RBF271
2. BMO Prime Money Market Fund BMO142
3. TD Canadian Money Market Fund TDB164
4. CIBC Money Market Fund CIB480
5. Scotiabank Money Market Fund BNS357
6. Fidelity Money Market Fund
7. Manulife Canadian Money Market Fund MMF4622
8. Sun Life Money Market Fund SUN107
9. CI Money Market Fund
10. Desjardins Canadian Money Market Fund

Money market and many fixed income funds offer “advisor” series class and “premium” class versions. Usually the advisor series funds have a higher MER and provide a higher trailer to the brokerage holding the fund (even if it’s a discount broker). Whereas many premium class funds require a high minimum investment but have lower fees.

Investors should also check out the growing universe of money market ETFs. With the growing popularity of commission free ETF trades and commission free trading in general, money market ETFs are growing in popularity.

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