Money market funds are just one of the many investment vehicles Canadians can park their capital. Money market funds are best suited for those looking for a low-risk, short-term investment with good liquidity.
Let’s dig deeper into money market funds to help you determine if this is the right avenue to take to invest your money.
Key Points
- Money market funds are low-risk investment vehicles that invest in liquid and short-term fixed income securities.
- Investors who prefer more flexibility with their investments may find money market funds ideal.
- Money market funds earn interest that is paid out to investors on a monthly basis at prevailing interest rates.
- Due to their low-risk feature, money market funds may not bring in high returns compared to riskier investment products.
What Is A Money Market Fund?
A money market fund is a type of mutual fund that invests in liquid and short-term fixed securities. As such, they’re more common among investors who are looking for more flexibility with their cash management and a short-term investment to add to their investment portfolio.
Like mutual funds, money market funds involve a portfolio of securities with shares that are sold to investors. However, they maintain a fixed net asset value (NAV) per share. This means that their price does not fluctuate day to day, maintaining stability.
Money market funds are conservative investment funds that are best suited for those with a low tolerance for risk. Any income generated is typically associated with short-term interest rates, so they’re not ideal for long-term investment strategies.
Types Of Assets You Can Buy And Hold With A Money Market Fund
When investors buy shares in a money market fund, the capital is used to purchase short-term securities, including the following:
- Bankers’ Acceptances — Bank-backed debt that promises a future payment.
- Certificates of deposit — Savings certificates issued by banks.
- Commercial paper — Unsecured short-term corporate debt.
- Repurchase agreements — Government securities.
- Treasuries — Government debt obligations.
How Do I Make Money With A Money Market Fund?
Money market funds try to hold a net asset value (NAV) of $1 or $10 per share in Canada. Any excess earnings are paid out to investors in the form of monthly distributions. This ensures that investors are paid on a regular basis, though the amount paid out is not necessarily the same for every payout.
Depending on the type of money market fund portfolio, any income earned may be taxable or tax-exempt.
Can I Lose Money In A Money Market Fund?
On rare occasions, money market funds may fall under the NAV. This may happen when the money markets experience temporary price fluctuations. This is called “breaking the buck.”
However, if this situation continues for a longer term, the money market fund’s investment income could end up lower than its investment or operating expenses. In this case, you could lose, though these situations are extremely rare.
Types Of Money Market Funds
There are a few main types of money market funds, including the following:
- Prime Money Fund — May invest in commercial paper and corporate notes of non-treasuries, such as certificates of deposit, US-government debt, and government-sponsored enterprises (GSEs).
- Government Money Fund — Must invest the majority of its total assets in cash, repurchase agreements, and government securities that are entirely collateralized by cash or government securities.
- Tax-Exempt Money Fund — Composed of municipal securities primarily exempt from federal income tax. Municipal bonds and other types of debt securities predominantly make up these types of money market funds.
All of these money market funds must adhere to regulatory requirements in terms of the fund’s investment diversification, the investment types held, their liquidity, and their maturity.
What To Look For In A Money Market Fund
Before investing in a money market fund, take the time to assess various key factors to ensure that you’re investing in a sound fund. Here are a few tips to consider:
Yield
The goal of a money market fund is to make money. As such, it makes sense to look at a money market fund’s yield over time and to compare its average yield to other funds. In general, money market fund yields will rise and fall in lockstep with prevailing short-term interest rates.
High-Quality Securities
Money market funds invest in several short-term securities, as mentioned. Look into these securities to make sure they’re of high quality with minimal risk of default. At the same time, find out where your money is being invested by looking at the fund’s investment portfolio and ensure that it’s diversified appropriately to hedge against risk.
NAV Stability
While it may be uncommon for a money market fund NAV to fluctuate below $1, it can happen. Consider looking into the fund’s history to see if it’s been able to maintain its NAV.
Fees
Look at the fund’s management fees and compare them to the typical yields to determine the expense ratio. The lower the ratio, the higher the returns, and vice versa.
Money Market Fund Vs Money Market Account
Some may confuse money market funds with money market accounts, but they are not the same. A money market fund is regulated by the Securities and Exchange Commission (SEC) in which your capital is invested in the stock market. On the other hand, a money market account is a type of savings account that is insured by the Federal Deposit Insurance Corporation (FDIC) and offered by banks and other financial institutions.
Essentially, a money market fund is an investment instrument, while a money market account is more or less a general savings account. Since money market accounts involve investing money, there is a risk that comes with losing capital.
However, they are a low-risk type of investment, so they are a much safer way to invest compared to other investment vehicles. Because of their investment component, money market funds offer a greater opportunity to earn higher returns compared to money market accounts.
What Is The Average Yield For Money Market Funds In Canada?
Over the years, the average yield for a money market fund has varied quite a bit. That said, yields have ranged from roughly 0% to 5% over the past 20 years. Some of the lowest periods included 2009 to 2010, then again from 2020 to 2021 during the health crisis.
Money Market Funds In Canada
The following are some of the Canadian money market funds available:
| Fund | Total Assets ($ Million) | 1-Year* Average Yield |
| BMO Money Market Fund | $3,115.00 | 4.52% |
| Scotia Money Market Fund Series A | $103.00 | 4.46% |
| TD Premium Money Market Fund – I | $1818.34 | 4.98% |
| RBC Canadian Money Market Fund | $4,746.08 | 4.99% |
| CIBC Money Market Fund – Class A | $3,000.40 | 4.9% |
Pros And Cons Of Money Market Funds
There are several perks that come with investing in money market funds to earn returns over the short term. However, there are also some drawbacks to consider.
Pros Of Money Market Funds
There are several reasons to consider investing in money market funds:
- Low risk. The diversification and low volatility of money market funds make them a relatively low-risk investment.
- Low investment requirement. Unlike other types of investments — like real estate — money market fund investing does not typically require a massive upfront investment of capital.
- Better returns than a savings account. Both money market funds and high-interest savings accounts are safe ways to invest your money, but the former offers a much higher potential for returns.
Cons Of Money Market Funds
There are some notable downsides to investing in money market funds to consider:
- Expense ratio. Money market funds charge a fee to cover the cost of managing the fund, which is known as the “expense ratio.” This fee can eat into your earnings made from the fund and leave you with less.
- Inflation. Since money market funds are low-risk investments, they offer lower returns than riskier investments like stocks. As such, inflation can reduce your returns over time.
- No guarantee of return. While there is very little risk associated with investing in a money market fund, there is also no guarantee on the rate of return.
Final Thoughts
Money market funds are ideal for certain types of investors. If you’re a conservative investor who’s looking for a low-risk investment that offers high liquidity, then a money market fund may be worth looking further into.
