Money Market Funds are funds which offer very stable returns at low risk. They are able to do this because they consist of short-term government bonds (e.g. US treasury bonds), bank deposit certificates, and commercial paper.
If you invest in a money market fund, you are essentially lending money to the governments of mature countries like the United States and you can imagine the odds that they won’t pay you back are extremely low.
Given their high liquidity, low risk and stable returns, they are an essential part of an investor’s portfolio to store idle cash and to fight inflation, especially when the investment environment is uncertain.
How to buy a money market fund
There’s a couple of ways to get money market funds. You can buy Money Market Fund ETFs from any securities firm (although there are none available in the HK exchange, there are several in the US exchanges) – read how to open a US Brokerage account here. Another way to is buy them through a fund house like FundSuperMarket or Futu MoneyPlus.
Futu’s MoneyPlus platform, in particular, offers very seamless access to money market funds. Once you open an investment account, while you are deciding what stocks to buy, you can just deposit your money into one of the funds offered by their MoneyPlus platform. You can choose a USD or HKD money market fund depending on the currency you hold and withdraw the money at any time, either back to your bank account or to invest in the market!
Performance vs Time Deposits
The returns of money market funds depend on the holdings in it. For example, if a fund is buying very short-term bonds, then the return will be lower (1.5% to 2%). If the fund consists of longer-term bonds as well, the return may be more than 2%. Essentially, the returns are quite comparable to time deposits.
We looked at the Time Deposits of more than 10 banks and the median interest rate is about 0.6%. You can, of course, get higher interest rates but only if you invest very large sums or only for a very short period of time (e.g. with 3 month promotional offers, etc). Among the money market funds of Futu MoneyPlus in USD and HKD, the median interest rate is 1.6%
If you were to deposit HKD 100,000 into an average Time Deposit and an average Money Market Fund, this is the kind of returns you will see over time:
Over time, you can see this difference in returns can add up quite fast. Again, you can find some time deposits with better interest rates on the market, but there are often more restrictions on the deposit period and amount, and sometimes are just short-term offers. Money market funds generally have good returns as long as you’re careful to note what kind of fees you are paying!
| Money Market Fund | Time Deposits | |
|---|---|---|
| Fees | 🙂 Low | 🙂 Low |
| Risk | 🙂 Low | 🙂 Low |
| Liquidity | 😀 High | 😭 Low |
| Risk | 🤔 Very Low | 🤔 Very low |
A must-have tool for investors
In summary, money market funds have low investment costs, low risks, and high liquidity. The withdrawal of funds is far more convenient than time deposits. However, like time deposits, returns are not high and are affected by short-term interest rates and exchange rate fluctuations. Although money markets are probably not great as your primary investment product, especially for longer-term goals like retirement or financial freedom, they are very useful to store excess cash or to bring down the volatility of your investment portfolio. It’s safe to say it’s an essential tool in your investment toolbox.
Depending on your goals, money market funds may not be the right choice for you. For longer term goals like retirement or financial freedom, you may want to invest more into stocks which may give higher return. Take the first step by comapring investment brokers to pick the one with the lowest fees:
Next steps
Important information:
Investment involves risks. This information is intended to be educational and is not tailored to the investment needs of any specific investor. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. Past performance is no guarantee of future results. The value of investments and the income from them can go down as well as up, so you may not get back what you invest.
