What is a money market fund?

A money market fund can be an opportunity to earn slightly higher returns than a regular savings account, though still with fairly low levels of risk.

Interest rates in Australia are exceptionally low at present – great news if you’re paying off a home loan, but not so rewarding for savers. As a guide to how rates have plunged over the years, data from the Reserve Bank of Australia (RBA) shows that back in 2008, it was possible to earn 7% or more with an online savings account. Since then, interest rates on savings accounts have steadily declined. Today, the average return across online savings accounts is just 0.05%, according to the RBA’s figures, although Canstar’s database shows there are higher rates to be found for people who compare their options.

If you like the low-risk nature of savings accounts, but you’re keen for an opportunity to earn slightly higher returns, a money market fund could be worth a look.

What is a money market fund?

A money market fund is a type of unlisted managed investment scheme. This means you pool your money with that of other like-minded investors, and a professional fund manager makes the investment decisions on your behalf.

When it comes to money market funds, the main objectives of a fund manager are usually to preserve investors’ capital while generating a return, and possibly providing investors a regular income.

What do money market funds invest in?

Each managed fund has its own guidelines around what it invests in, however as the name suggests, a money market fund will typically invest in a variety of money market securities. These can include overnight cash, short-term money market deposits, short-term government bonds and bank bills. The Product Disclosure Statement (PDS), Target Market Determination (TMD) or other product documentation for each fund will explain in more detail what the fund invests in.

5 tips for investing in money market funds

Money market funds are generally regarded as a low-risk investment compared to more ‘volatile’ options such as shares, but it’s still important to understand how these funds work. Check out our pointers below to make an informed decision.

1.    Your money is not protected

Unlike cash held in a savings account or term deposit with a bank, building society or credit union, money market funds are not covered by the Australian Government’s deposit guarantee under the Financial Claims Scheme, which applies to deposits of up to $250,000 per customer, per institution.

2.    Low risk could mean low returns

Financial regulator ASIC’s Moneysmart website confirms that managed funds investing in short-term money market deposits, government bonds and bank bills, are very low risk. However, the trade-off for low risk can often be low returns. Based on 2019 , Moneysmart estimates a cash fund can have an expected return – before fees and taxes – of around 3.1% annually. To put it another way, Moneysmart says this means $10,000 invested in a cash fund could grow to be worth $13,600 after 10 years (before taking into account fees and tax), whereas a riskier growth-oriented managed fund could be worth around $17,100 before fees and tax. 

Bear in mind, past returns are not a guide for future returns, and Moneysmart warns returns “can vary a lot from year to year”, particularly when it comes to higher-risk investments.

3.    Watch for fund fees

Managed funds, including money market funds, typically charge annual fees in return for managing your investment. Fees can vary widely between funds, and it’s important to check what fees you’ll pay before committing to a particular fund, because high fees can eat away at your returns.

4.    Money market funds can have a variety of names

Managed funds are often marketed to investors under a variety of names. So, you may come across a money market fund described as a cash fund, a yield fund or a regular income fund. This highlights the need to look under the hood of the fund to understand exactly how your money will be invested, how much risk is involved, and how often any returns will be paid to you. The PDS and other product documentation should set out all the details you need. If in doubt, contact the fund manager for further information, or consider seeking professional advice.

5.    Funds often have minimum investment limits

Managed funds usually have minimum investment requirements. These are limits around how much money you need to invest to get started with the fund, and how much you can add to the fund on a regular basis (if you choose to). Check to be sure you meet the minimum requirements.  

If you’re unsure whether a money market fund is right for your goals, it may be worth speaking with a qualified financial adviser.

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