Source: Sina Finance
In the face of continued turmoil in the banking sector, investors seeking higher yields have poured into US money market funds.
According to Investment Company Institute, in the three weeks to March 29thMore than $300 billion flowed into money funds, with total assets reaching a record $5.2 trillion, exceeding the peak of $4.8 trillion during the epidemic..
Experts say there are many reasons why money market funds are popular, but there are also risks.Here are a few factors to consider when deciding whether to invest or not.
What is a money market fund?
Money market fund is a kind of mutual fund. People usually put money that is waiting to be invested or that may be needed in the short term into such funds.
Money market funds hold a variety of short-term liquidity instruments, including cash, certificates of deposit, and U.S. Treasuries, which need to comply with federal rules on quality, maturity, liquidity and diversification. Funds must allocate at least 10 per cent of their funds to daily liquid assets and 30 per cent to weekly liquid assets; the SEC now recommends raising these two types of positions to 25 per cent and 50 per cent, respectively.
These funds have a historical value of $1 per share and pay interest. There is no guarantee that investors will not lose money because it is not insured by the Federal Deposit Insurance Corporation (FDIC), but if it falls below $1 net worth, it usually quickly loses its appeal.
The fees charged by large retail fund providers vary, with Vanguard 0.09 per cent, Charles Schwab Corp 0.34 per cent and Fidelity 0.42 per cent. You can buy such funds on the websites of brokerages or mutual fund companies, just like stocks or other fixed-income funds. If you participate in the 401 (k) plan, there is also the option of money fund options.
What is the attraction?
One big attraction comes from yields. According to March data provided by FDIC, Fidelity government money market funds (SPAXX) yielded 4.49% as of April 5, compared with the national average interest rates of 0.06% for checking accounts and 0.37% for savings accounts. Even for high-yield savings accounts, interest rates are not too high. Goldman Sachs Group's Marcus is currently 3.75%.
Money market funds are more flexible than banks in transmitting the impact of interest rate adjustments. According to a blog post by the Federal Reserve Bank of New York, about 86% of the policy rate adjustment over the past 20 years has been reflected in retail money funds, while the retail certificate of deposit rate reflects only 26%.
What are the risks?
Money funds are sensitive to changes in interest rates, so yields are volatile. And unlike traditional savings accounts, FDIC does not underwrite such products.
The biggest problem in the past was institutional quality funds (Prime funds), which tend to be more sensitive to market panic because they hold commercial paper. When the epidemic hit in March 2020, these funds suffered large outflows; the Fed had to intervene to support short-term funding markets. In 2008, Reserve Primary Fund fell below its net worth of $1, and investors withdrew $40 billion in just two days because the fund invested in commercial paper from bankrupt Lehman Brothers.
The current banking crisis has also raised investor concerns about quality money market funds. In mid-March, Charles Schwab Corp's quality fund had a net outflow of $8.8 billion in three days, while Charles Schwab Corp's own government and US Treasury funds attracted about $14 billion over the same period.
What's the difference between them?
There are three main types of money market funds:Government funds, quality funds and U.S. Treasury funds. Funds for retail investors are mainly government-funded funds.
Government funds: at least 99.5% of the assets of these low-risk funds are allocated to cash, US government securities and repurchase agreements backed entirely by government securities.
Quality funds: these funds hold cash, floating rate bonds and commercial paper, and bonds that may come from highly rated banks in the United States and overseas, U.S. government agencies, and government-backed companies such as Fannie Mae. The English name of the fund may not have the word prime. For example, Charles Schwab Corp's quality fund is called Value Advantage Money Fund and Fidelity's is called Fidelity Money Market Fund.
Treasury funds: these funds mainly invest in cash, US Treasuries, and repurchase agreements guaranteed by US Treasuries. There is also a fund that invests only in cash and US Treasuries. There may be risks in the short term. "the United States will hit the debt ceiling later this year, and Treasury funds can only buy Treasuries," said Peter Crane of Crane Data. "It is more difficult for US Treasury funds to avoid technical default than government funds.".
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