Money market fund as one of the best options available to risk-averse investors to invest their money has its advantages and drawbacks. The money market fund provides you with a higher return than saving accounts and it is safer than bonds. So, investing in money market is one of the best investment options because it combines a higher interest rate with safety. Therefore, it is a smart investment option to invest your short-term savings.
What is the money market?
A money market is a market in which financial instruments such as cash, cash equivalents, and others with high liquidity as well as short maturity date are traded. So, investment in the money market involves investing in securities like treasury bills, commercial papers, certificates of deposits, and others with short-term maturities.
However, individuals can only invest in the money market by investing a small amount of money. This is because transactions in the money market involve large transactions and only occur between companies and financial institutions. Therefore, investors can invest in the money market by buying units of a money market fund either from a mutual fund company or through a broker. This investment involves payment of agency fees and it may require a minimum amount to invest in a money market fund.
Types of money market funds
The types of money market funds include the following:
These are short-term and government securities that can be redeemed at the face value at the maturity date. Central Bank of Nigeria is in charge of issuing treasury bills at a regular period.
These are in the form of promissory notes that companies and financial institutions can issue to the investors. So, they are unsecured financial instruments.
Certificates of deposit
This is the situation where investors deposit money in the bank for a particular period. The rate of interest is largely depending on the deposit period. Therefore, the longer the deposit period, the higher the rate of interest.
These involve sales of securities at a particular price to the investors and promises to buy them back in the future at a higher price. However, they are sales but are regarded as short-term collateralized loans
This is the situation in which the bank guarantees its customer that the other party will pay for the goods received at a later date usually between 30 to 60 days after the delivery. So, Bankers Acceptances are bank loans for international trade. Therefore, the bank accepts the responsibility of paying for the goods delivered to the customer at the agreed time.
A swap is an arrangement in which two parties enter into a derivative contract to exchange pre-agreed cash flows from two financial instruments at a future date. However, the value of the swap is determined from the underlying value of the two streams of cash flows. So, each stream is called a leg.
Benefits of money market funds
If you are a risk-averse investor, you can invest your money in a money market fund, because it is a low-risk investment. So, the risks are limited by the Asset Management Company (AMC). It has fewer risks compared to other investment options like stock, bonds, and others.
Money market funds offer higher returns compare to conventional cash equivalents like saving accounts from banks. Therefore, it yields higher returns compare to other cash equivalents.
It provides investors with liquidity because the money market involves short-term securities that have high demand and they can be liquidated for cash easily. Therefore, money market funds are highly liquid.
A money market fund is a relatively safe investment. According to the Securities and Exchange Commission (SEC), only securities with the highest credit ratings must be traded in the money market. So, this creates a high degree of safety for investors’ money.
In conclusion, investing in money market funds is very safe and yields higher returns to every investor. However, before you invest in it make sure to gather all the necessary information about it so that to have a successful investment.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.