There are now more than $6 Trillions in assets allocated to money market funds! To put things in perspective this represents more than 35% of the total deposit sitting with banks.
Given the large inflow we review here the basic of what is a money market funds as well as as what are the underlying reason why this asset class is experiencing some some demand
What is a Money Market Fund
A money market fund is a type of mutual fund that invests in short-term, low-risk securities such as government bonds, certificates of deposit (CDs), commercial paper, and other highly liquid and safe instruments. These funds are designed to provide investors with a relatively stable investment option that aims to preserve capital while generating yield. Overall Money market funds are known for their liquidity, meaning investors can easily buy or sell shares in the fund and access their money quickly and this explains why they are commonly used by large corporations to manage their idle cash.
Two types of Money Market funds
There are two main type of Money Market funds:
1) Government Backed Money Market Fund: A Government-backed money market fund is a type of money market fund that primarily invests in short-term securities issued or guaranteed by the government or government-sponsored entities (GSEs). These funds typically invest in highly liquid and low-risk instruments such as Treasury bills, Treasury bonds, agency securities (issued by GSEs like Fannie Mae or Freddie Mac), and short-term government bonds.
2) Prime Money Market fund: A prime money market fund is a type of money market mutual fund that invests in short-term, highly liquid securities such as commercial paper, certificates of deposit (CDs), Treasury bills, repurchase agreements, and other short-term debt instruments. Their difference compared to a Government backed money market funds comes from the fact they invest not only in government backed securities but also short-term debt securities issued by corporations and financial institutions with strong credit ratings (typically rated A1/P1 or higher by rating agencies like Moody's or S&P).
Why are Money Market Funds Experiencing Large Inflows?
As we can see from the chart below the total asset under management of money market funds has surged to more than $6Tr, having grown by more than $750Bn over the last year alone.
Money Market Fund Asset Under Management (in $ Billion). Data: Bloomberg
Several factors are behind the recent surge in money market fund demand. Money market funds have experienced large inflows for several reasons:
- Safety and Stability: Amid economic uncertainties or market volatility, such as the banking troubles last year, investors and businesses are looking for safe havens for their cash. Money market funds are considered safe due to their investments in short-term, low-risk securities
- Higher Yields: Compared to traditional savings accounts or other cash equivalents, money market funds often offer slightly higher yields. With the recent increase in Fed Fund rates Money market funds have now become particularly compelling.
- Liquidity: Money market funds provide high levels of liquidity, allowing investors to easily access their funds when needed. This makes them attractive for investors looking for short-term investment options without locking up their money for extended periods.
- Cash Management: Institutional investors, corporations, and financial institutions often use money market funds for cash management purposes. These funds offer a convenient way to park excess cash reserves while maintaining liquidity and earning a modest return.
Conclusion
As we have seen, money market funds are a compelling alternative to leaving cash in a bank account especially given the much higher interest rate they provide as well as their safety. If you are a business Treasure can help you safely allocate to Government backed money market funds (more info here) and you are a Fintech Treasure can help you embed a money market funds offering on your platform to delight your customer with a better access to yield and safety (more info here).
