Money Market Funds: Features, Advantages, and Functions

Income in Money Market Funds arises from capital gains and interest payments. The market price of the funds and interest rates move in the same direction. A rise in interest rates increases the funds' market price, giving investors higher interest incomes. In contrast, a fall in the interest rates lowers the market price, thus reducing investors' interest income. Therefore, the best time to invest in any form of money market is when there is a rise in interest rates.

Features of Money Market Funds

Fixed returns – the instruments on the money market are provided at a discount on their nominal value. The determination of the amount that investors should receive on maturity is done in advance and this allows people to choose their most appropriate investment instruments considering their investment needs and financial plans.

Ø Security of investment

The returns on different money market instruments are predetermined and the issuers have high credit scores and ratings. This makes it difficult for the investors to lose their investments making them a more secure investment.

Ø Highly liquid

Money market instruments are highly liquid enabling investors to easily convert their investments to cash and easily access the funds. Investors can access their money daily without having to incur significant charges or penalties.

Ø Stability of returns

The return on the money market instruments is usually in the form of interest income which is stable considering that it is determined by the underlying market rates at the specific time.

Ø Regulation

Money market funds operate under the regulations of the specific region to enhance liquidity and safety. For instance, the regulatory body in the US is the Securities and Exchange Commission (SEC) under rule 2a-7 of the Investment Company Act of 1940, while that in Kenya is the Capital Markets Authority (CMA).

Advantages of investing in the money market funds

Here are some reasons why one should invest in money market funds.

Ø Convenience

MMFs offer simple investment options for investors with minimal management costs. The funds also offer flexibility to investors by availing their funds when they need them or within short notice.

Ø Safety

Money market funds offer security to investors because the instruments are invested in short-term but high-quality securities. they, therefore, offer a safe investment option for investors who want a stable ground to obtain returns on their investments.

Ø Low costs

Money market funds have lower management costs and fees compared to other mutual funds. They also have lower expense ratios which help preserve investors’ returns.

Ø Diversification

With various available instruments, investors can pool their resources and invest in the different available options. Such diversification reduces the risks of investments by spreading the risks across different securities.

Functions of money market funds

Money market funds have continued to prevail in the current economic and financial world due to their distinguishing features and their ability to serve unique functions that other investments and financial markets cannot. These functions include;

Ø Enhancing capital preservation

Investing in money market instruments serves as an efficient way of managing cash for both institutional and individual investors. It offers a safe option to temporarily store and save cash as one awaits other investment opportunities.

Ø Generating yields

Money market funds serve as a convenient way of generating yields in the form of interest income, which is higher than the interest derived from normal savings accounts in commercial banks and other financial institutions. Although their interest is low, money market funds offer steady income to investors.

Ø Providing liquidity

Money market funds enhance liquidity for both individual and institutional investors, such as commercial banks. These investors use their excessive funds to earn interest income which can be used to meet their liquidity needs and other unforeseen expenses and financial needs.

Conclusion

Conclusively, money market funds are the most appropriate option for investors who want a safe, liquid, and stable investment. Their investment in short-term and high-quality debt instruments enables them to offer low-risk and convenient access to cash making them appropriate for short-term investment needs and capital preservation. The advantages of convenience, low costs, safety, and liquidity make the instruments the most appropriate options for investors who are conservative and who need a reliable cash management solution.