As you’ve already seen, Moneyfarm’s Liquidity+ invests in money market funds managed by top asset managers, with a gross annualised yield currently higher than 5.3%* and a management fee of just 0.3% (+VAT), in addition to the underlying fund costs of 0.1%. It’s a low-risk solution suitable for the short term. Moneyfarm’s Asset Allocation team has specially selected these money market funds and will monitor their performance, adjusting the portfolio composition if necessary.
But let’s take a step back. What is a money market fund?
A money market fund is a type of mutual fund that invests in short-term debt financial instruments, such as treasury bills or repurchase agreements (repos), certificates of deposit and commercial paper, all with short maturities. Let’s take a closer look at some of these instruments:
- Treasury bills or repos: Treasury bills are short-term government debt securities with maturities ranging from 3 to a maximum of 12 months. Naturally, treasuries around the world issue debt securities with similar durations.
- Certificates of deposit: Certificates of deposit are restricted and transferable securities usually issued by banks. They have maturities ranging from a few months to years. At maturity, they provide interest payments through periodic coupons or in a lump sum, along with the repayment of the principal.
- Commercial paper: Commercial paper focuses on the short term and serves as a source of financing for businesses. It is a type of promissory note issued by companies and typically underwritten by banks, funds, or individuals. Its duration is generally less than or equal to one year.
Money market funds offer the potential to diversify your investments, ensuring relative stability and instant liquidity. They are favoured by investors with a low risk tolerance, a short-term investment horizon and capital that they do not want to leave idle in a bank account, especially during periods of high inflation. At the same time, they do not want to allocate these funds to longer-term instruments, such as equity investments.
The main characteristics of money market funds include diversification, low risk, short-term horizon and liquidity.
- Low risk: Money market funds are considered low-risk investments. This means that they are less likely to experience significant losses on the invested capital, as the fluctuations in their net asset value are minimal. This is due to their investment in low-risk instruments.
- Liquidity: These funds must ensure a high level of liquidity to meet potential redemption requests from investors on a daily basis. Therefore, there are no investment restrictions.
- Short-term time horizon: Money market funds are highly useful when there is a short-term time requirement. They invest in short-term money market instruments issued by financial institutions, governments, and corporations.
- Diversification: Money market funds invest in a wide range of instruments to achieve diversification.
*Based on the weighted average of the gross yields regularly published by the money markets funds held in Liquidity+ as of 17 November 2023.
Returns are sensitive to the Bank of England’s deposit rate fluctuations, with lower rates leading to lower yields and higher rates leading to higher yields.
Money market funds can be a great way to save for short-term goals. You can also capitalise on higher yields driven by the recent rate hikes.
As with all investing, your capital is at risk. Even though it’s a low-risk investment, this isn’t a cash product and there’s still a chance the value of your investments could fall and you might get less than you invested.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.