There is far more to the money markets than is suggested by their reputation as a holding station for cash. The asset class can offer flexibility, diversification, shelter from market volatility and, in an environment of elevated interest rates, they can deliver compelling yield.
Money market funds are a key beneficiary of the current economic landscape in which interest rates are likely to remain elevated for longer. Continued investor caution and stress in the banking sector is bringing systemic liquidity risks to the fore and reinforcing the need to diversify portfolio exposure. For institutions, money market funds have the potential to provide a low-cost, low-risk way to earn a return on their cash.
Understanding the money markets
The money markets are a platform upon which short-term, fixed income securities – typically with maturities of one year or less – are traded between issuers and investors. Issuers in the sector tend to be governments, banks and other large institutions that may use the markets as a source of short-term cash flow. Lenders are typically investors with a short investment horizon willing to commit funds, for a modest return. Instruments traded on the money markets may include government debt, certificates of deposit, commercial paper, repurchase agreements and other short-term debt securities.
Accessing the money markets via mutual funds
A money market fund is a professionally managed, diversified investment vehicle which investors can use to meet short-term cash-management needs or as an investment alternative to the volatility seen in stock or longer-term bond investments. They are typically highly liquid, high-quality mutual funds with the primary investment objective of current income, consistent with liquidity and stability of principal. They offer investors easy access to their cash and the potential for a market rate of income through investments in high-quality short-term debt securities.
How are money market funds used?
Investors can use money market funds to manage short-term cash needs (i.e. to keep some cash liquid for emergencies or near-term purchases) or as an allocation during times of volatility in the stock or longer-term bond markets.
Money market funds are also often used as part of an asset allocation strategy to add some stability to an overall investment portfolio. Such vehicles are highly suitable for institutional investors that:
· Have a short investment horizon
· Have a low tolerance for volatility, or want to offset volatility in other portions of their investment portfolio
· Need
