The first money market fund dates back to 1971 and was created in the United States. Since then, the industry has changed and grown to unimaginable levels. There are several reasons for this growth over the decades. One is that money funds are key elements in the financial markets, as they are arguably the oil that greases all their huge gears. Another is that they are very interesting products for investors, since they fulfill two vital functions in any investment portfolio: generating recurring returns and preserving capital.
This continued growth, however, has had its ups and downs. One of its lowest points was just before and during the pandemic, when interest rates were negative. But in recent years they have taken off again with a vengeance, thanks to interest rate hikes. A boost that has enabled the money market fund industry to attract many investors and thus exceed the aggregate value of six trillion dollars.
What is a monetary fund?
A money market fund is a collective investment vehicle that invests in what is known as the money market: that is, bills, bonds and other types of assets (generally debt) in the very short term of governments or companies with very high ratings. The key is in that last part, since if the duration exceeds six months (some authors accept up to 12 months), it is mostly understood that these funds are no longer money market funds, but a special type of them or directly fixed income.
How does a monetary fund work?
The operation of a money market fund is very simple, since the assets that comprise them are limited both by their rating and by their maturity. In short, they focus on those of high quality and with maturities of a few months from three main markets.
- The government debt money market, i.e. debt issued by governments.
- Interbank money markets: this comprises the market in which banks are financed and consists of various (short-term) assets such as credit operations, loans, derivatives, interest rate swaps, interbank deposits and other financial products with a maximum maturity period of one week.
- Corporate debt market: these are promissory notes of companies with high credit quality.
Advantages of money market funds for investors
As we have seen, numerous investors come to money market funds, attracted by their great advantages. Among them, we can highlight:
- Diversification: by investing in very short duration assets, what we are doing is broadening the portfolio range, which is often very focused on the long term. Therefore, money market funds are a good choice to complement the investment portfolio. In addition, they tend to have lower potential risk due to their term and rating characteristics.
- Liquidity: positions can always be sold as the need arises to have the money available, within a few business days. In this case, care must be taken to ensure that its value is not less than what we have paid for it, as it fluctuates.
- Low volatility: the very fact that they are made up of short-term assets with a very high rating makes them products whose market value fluctuates very little. In other words, their volatility is very low. After all, this is logical, because in such a short time, some of them mature in weeks, it is difficult for the situation of a country or a solvent company to change drastically.
- Safe-haven assets: another of their great advantages is that they provide investors with security in difficult times. On the one hand, because the high rating of their assets makes them less prone to losses in times of uncertainty. On the other hand, because when things go wrong, they usually benefit from higher interest rates, making them more profitable. Especially when inflation is high.
The momentum of money market funds
Last year was undoubtedly one of the best years for money market funds. In fact, the assets of all of them had grown by 25% in Spain alone. Behind this increase in investor demand are not only the above characteristics, but also the fact that they offered high returns. In general terms, the profitability of these products usually follows the Eonia (‘Euro OverNight Index Average’), which has now been renamed ESTER, and is the index that represents the weighted average of all unsecured overnight lending operations in the interbank market, carried out in the European Union.
The ESTER reached historically high values in the fall of 2023 and is still there. In fact, throughout the month of April its average yield was above 3.9%, which puts it well above other conservative products such as deposits or interest-bearing accounts and beats inflation, which is already close to 2%, by a wide margin.
Investing in money market funds the easy way: bond portfolios
As you have seen, the benefits of investing in money market funds are many and may have convinced you to do so. However, keep in mind that it can be complex at times. Firstly, because there is a very large number of them, and you do not know in advance which one may work better or worse. Secondly, because the intermediaries or platforms you use to acquire them often charge high commissions, which reduces their overall profitability.
However, there is an alternative with which you can benefit from the best money market funds chosen by experts and with reduced commissions. This alternative is the investment in bond portfolios offered by some roboadvisors, automated portfolio managers, which are made up of indexed investment funds that accumulate returns and are transferable, allowing tax deferral. In this way, you can benefit from all the advantages of money market funds, while making them easier to invest in.
inbestMe bond portfolio: the best choice for investing in money market funds
One of these platforms with which you can incorporate these products into your portfolio is inbestMe, a roboadvisor with more than five years of experience in Spain and which has a wide range of investment products. Specifically, the firm has two different portfolios for fixed-income funds: a “Prudent” one, for more conservative investors who want to get a return on their money through short-term debt products; and another called “Bold” that invests in longer-term bonds and also incorporates money market funds, precisely to reduce the volatility of longer-term debt assets.
Both, in turn, have different portfolio options depending on the currency you prefer or other specifications, although all of them are created to generate returns while preserving capital. So, if you are interested in this type of products and want to do it with the best team, visit inbestMe and start multiplying your savings.
