Are Money Market Funds a Good Place to Park Your Cash?
All Canadian investors need a place to park their short-term savings, like an emergency fund or money set aside for a major purchase. Along the way, it would be nice to earn a little interest. But with interest rates at all-time lows, it can be hard to know what low-risk investment is best.
The main choices are money market funds, Guaranteed Investment Certificates (GICs), or a plain-old savings account. In this article, I’ll cover everything you need to know about money market funds and let you know how they stack up as a place to park your cash. Ready? Let’s dive in!
What Is a Money Market Fund?
A money market fund is a type of mutual fund that invests in high-quality money market securities which are highly liquid and have terms to maturity of one year or less, such as Government of Canada Treasury Bills, cash funds, and cash equivalents.
The fund is managed by a portfolio manager or team of fund managers, as with any other mutual fund. The main purpose of a money market fund is to provide interest income in a liquid investment that is low risk, thereby protecting the investor’s principal.
What Does a Typical Money Market Investor Look Like?
Investors who are buying money market funds don’t belong to one particular demographic, such as age or income. However, most money market investors have two characteristics in common. They’re investing for the short-term, and for that reason, they do not wish to take on a lot of risk with their money market funds. Preservation of capital is their primary objective.
You may be wondering why this is? After all, the higher the risk, the higher the return, right? It often comes back to the timeframe. Money market funds should be considered short-term investments. This isn’t money you’re planning to invest over the next 20 years. Funds in a money market account might be used to purchase a business, a vehicle, or pay for an upcoming vacation.
How Do Money Market Mutual Funds Work?
When you purchase a money market fund, you buy units the same way you would with any other mutual fund. In Canada, the unit price, or net asset value (NAV) of a money market fund is usually fixed at $10 per share. The goal is for the fund not to lose money, and any growth, after expenses are paid is distributed to investors.
As with any other mutual fund, there are costs involved with operating money market funds. This is expressed in the Management Expense Ratio, or MER charged annually and expressed as a percentage. Because of the passive, low-risk nature of money market funds, the MERs are much lower than what you would find with an actively traded mutual fund, such as a Canadian Equity Fund. For example, the TD Canadian Money Market Fund (featured below) has an MER of just .46%.
Money Market Funds Pros and Cons
We’ve already explored some of the benefits of money market funds; for example, they’re low-risk and highly liquid, which means they’re easy to buy and sell. But they aren’t suitable for everyone, and they certainly have their drawbacks, especially for long-term growth investors. Let’s take a closer look at the pros and cons of money market investing:
Money Market Fund Pros
1. Money market funds are highly liquid. Unlike other safety investments, like GICs, money market funds are never locked in. When you sell a money market mutual fund, you will usually have access to the cash within 1 or 2 business days.
Money market funds are traded on the stock market. However, unlike individual stocks, money market fund trades are only processed once per day. The typical cutoff time is 3 PM Eastern. As long as your order is received before this time, you should receive your funds at the start of the next business day.
2. Money market funds are convenient. If you are set up for online investing, whether through your bank or a discount brokerage, you can buy and sell funds with a few clicks of a button from the comfort of your living room.
Not all investments can be self-directed, resulting in more legwork to make purchases or redeem funds. A savings account is also a convenient way to buy a safe investment, but the interest rates do not always equal a money market fund.
3. Money market funds are ideal for managing risk. Whether for emergencies or an upcoming purchase, everyone should hold a portion of their portfolio in a low-risk, safe investment. It doesn’t matter if it’s 10% of your holdings or 50%. Money market funds are flexible enough to make managing the risk in your portfolio easy.
Money Market Fund Cons
Believe it or not, there are risks to investing in money market funds if you don’t do it properly. Here are some drawbacks or disadvantages to being invested in a money market fund.
1. Money market funds are not guaranteed. While money market funds are considered a safe investment and the potential of losing your principal is remote, they are not guaranteed by the mutual fund issuer, nor are they insured by Canada Deposit Insurance Corporation (CDIC). So, there is always a chance that you could lose your principal. This is one of the key differences between money market funds compared to a savings account or GIC.
2. Money market funds are susceptible to inflation rate risk. If you are a long-term investor and your money is held in a money market mutual fund, your potential for long-term growth will be stifled by the minimal return potential of the fund. In fact, if inflation were to increase at a faster rate than your investment returns, the purchasing power of your investment could actually decrease in value over time. That’s why it’s important to review your investment asset allocation regularly to ensure you’re invested properly.
What Are Some Examples of Canadian Money Market Funds?
To help you better understand what a money market fund looks like, here is a list of some larger funds available in Canada. This list is purely informational, I’m not endorsing any of the funds on this list, and you should always do the proper research before deciding to purchase any investment.
- Symbol: TDB164
- MER: .46%
- Total Assets: $1.7 billion
- NAV: $10.00
- Minimum Investment: $100
- Early Redemption Fee: Nil
Summary: This big-bank money market fund lists the FTSE Canada 30 Day T-Bill Index and FTSE Canada 60 Day T-Bill Index as benchmarks. In addition to government t-bills, it offers some exposure to high-quality corporate investments.
- Fund Code: FID229
- MER: .68%
- Total Assets: $1.3 billion
- NAV: $10.00
- Minimum Investment: $500
Summary: Investment mix includes cash and exposure to high-quality Canadian corporations through Banker’s Acceptances, Commercial Paper, and Canadian Provincial Bonds.
- Fund Code: MMF4622
- MER: .52%
- Total Assets: $257 million
- NAV: $10.00
- Minimum Investment: $500
Summary: This Canadian Money Market fund from Canadian insurance giant Manulife holds high-quality, short-term fixed income securities and strives for capital preservation and stability. The top 3 holdings of this fund are Canadian Liquid Bond, Canadian Short-Term Notes, and Canadian T-Bills.
Where Can I Buy a Money Market Mutual Fund?
If you think that a money market mutual fund might be suitable for you, the good news is that they are easy to find and purchase. If you have someone who manages your investments, such as a financial planner, or an investment advisor where you bank, you can arrange an appointment to discuss adding a money market investment to your portfolio.
If investing on your own is more your style, the easiest way is by opening a self-directed investment account from one of Canada’s leading online discount brokerage firms. All banks have their own online brokers, or you could choose an independent broker, such as Questrade or Wealthsimple Trade.
Generally speaking, the big bank brokers offer leading-edge trading platforms at a higher cost, while the independent firms prioritize low fees and convenience.
Final Thoughts on Money Market Mutual Funds
Perhaps the best way to think about money market mutual funds is that they’re a great place to park money for the short term. Alternatives to money market funds would be a savings account or possibly a GIC, which will pay you a higher interest rate if you are willing to lock your money in for a period of time.
At the moment, short-term interest rates are at all-time lows, so you can expect minimal returns on money market funds. However, the same can be said for any savings account or GIC. If you’re not interested in money market funds, but you still need liquidity, you might be better off opening a high-interest savings account from one of Canada’s online banks, like EQ or Tangerine.