Money market funds: where cash waits between decisions

When money is already in a brokerage account but no purchase decision has been made, it earns nothing. Money market funds are the common answer to that situation.

What is inside

Short-term money market instruments: reverse repo with the central counterparty, deposits, very short bonds. The instruments' terms are measured in days, so sensitivity to rates is minimal.

How the price behaves

The unit rises almost monotonically, reflecting accrued interest income. Meaningful drawdowns do not occur under normal conditions — that is exactly the property the instrument is used for.

When it fits

As a temporary home between trades. As a place for the part of a portfolio held in reserve for future purchases. As an alternative to a short deposit when instant access is required.

When it does not

As a long-term investment. Money market returns follow the policy rate and over a long horizon lose to both equities and long bonds — otherwise nobody would take on their risk.

Costs

The management fee eats part of an already modest return, which makes it especially significant for this class of fund — Fees: small numbers that decide the outcome.

Taxes

Income arises when a unit is sold. Over a short holding period the ownership relief does not apply — Long-term ownership relief: paying no tax without arranging anything in advance.