Simply put, a money market fund is just another type of mutual fund. A common investment choice for people from all walks of life. This investment is best suited to those looking for a short-term, low-risk return.
By the end, you’ll hopefully have a better grasp on the concept and will be a bit closer to making your investment decision.
What Is A Canadian Money Market Fund?
A money market fund is just another type of mutual fund. Through money market funds, investors can hold investments for shorter periods of time.
Traditional mutual fund investments might require a minimum commitment period that is too long for some investors. While there are many options for short-term investments, such as GICs or high-interest savings accounts, money market mutual funds are a better-performing option.
Moreover, other mutual funds have significant risk attached to them, whereas money market funds are relatively low risk. One of the key investment objectives is the preservation of capital, which is achieved through low-risk investments such as bankers’ acceptances, commercial paper, federal or provincial bonds or notes, and treasury bills. It should also be noted that any profits made on money market funds may be subject to income tax.
How Does A Money Market Fund Work?
Very similar to mutual funds, money market funds involve numerous investors coming together to pool their money to buy fixed-income assets, such as those mentioned above. However, this is where the similarities pretty much end.
Unlike most mutual funds, you can expect monthly payouts in the form of dividends when it comes to money market funds. Moreover, unlike mutual fund units, as the key strategy of money market funds is to preserve capital, they typically have a set unit value that is rounded off to the dollar.
Payouts occur when the price of the fund unit rises above its Net Asset Value. Then if the price rises above the fixed amount per unit, investors are paid according to the amount each unit has grown. With a Canadian money market fund, you can expect the price to be either $1 or $10 per unit.
There is the rare occasion where the price per unit will fall below the Net Asset Value, where the fund’s investment income is not enough to even cover the expenses required to run it.
This would be one of those rare instances where investors will lose out on their investment in a money market fund. However, the chances of this occurring are so rare that it is almost negligible, especially, in the long run.
Even in instances when there is an indication of a larger economic crisis these investments are more likely to retain their value as compared to stocks and other volatile investments. As such, money market funds are generally considered risk-free.
Advantages & Disadvantages Of Money Market Funds
They are many advantages to money market funds. However, in some instances, it could also be detrimental to your financial plan. To help you understand if money market funds are for you we have broken down the advantages and disadvantages of each.
Advantages Of A Money Market Fund
The foremost advantage of money market funds is their highly liquid nature. Since these are short-term investments and the selling process is so convenient and straightforward, you could have access to your money within a matter of days.
The fact that money market funds are considered low-risk means that most funds would typically invest in government securities and high-quality blue-chip corporate debt. The likelihood of default and permanent investment loss is very slim.
Money market funds provide for a fixed-income investment and, as such, could be a very good addition to tax-sheltered registered accounts. You’ll also be able to add some diversity to your investment portfolio as these funds are made up of multiple assets. All of this provides for some much-needed stability and security when it comes to your investments.
Then there are the earnings tied to money market funds. There is a very strong potential to earn higher interest rates on the money you’ve invested in comparison to other options such as a savings account.
You’re also looking at monthly dividends, allowing you to reinvest your cash or just use it to supplement your existing income.
Disadvantages Of A Money Market Fund
Low risk, means lower returns. As such, you should be looking at money market funds as only a way of adding fixed-income assets to create a more diversified portfolio.
Some money market funds might also have a lot of different fees attached to them, so be sure to read the fine print before you invest your money.
The minimum investment threshold on money market funds also tends to be on the higher side. It can range anywhere from $100 to $3000, which makes it more suited to institutional investors.
Alternatives To A Money Market Fund
Despite the many advantages of money market funds, there are many low-risk alternatives available to the public. These options include high-interest savings accounts, money market accounts, and short-term bonds (or even a bond fund).
Money market accounts are similar to savings accounts but they offer some facilities that are normally associated with checking accounts. You can speak to a financial adviser about the different types of money market accounts that are available in the Canadian financial markets.
High-interest savings accounts offer higher interest rates. You also have the liquidity that usually comes with money market funds. In most cases, such accounts are protected by the Canada Deposit Insurance Corporation (CDIC). This limits your investments to an amount of $100,000.
Finally, there are short-term bonds that are issued by the government, financial institutions, or large-scale corporations. Bonds do carry a bigger risk than money market funds but they have higher interest rates (which means a high rate of return) and lower fees attached to them.
How To Invest In A Money Market Fund?
There are several ways for individuals to invest in money market funds.
You can choose to go through a financial advisor such as Eastport Financial Group Inc , in Halifax, NS. We, in addition to helping you invest in money market funds, can also advise you on personal and business financial matters offering competent and prudent financial solutions.
You could also use a bank as your broker if you’d like. Most renowned Canadian banks will have advisors on their staff who can help you with numerous types of investments.
Whatever route you take, make sure you’re going with someone who is renowned. Also, be wary of any hidden fees that can cut into your investment returns.