A money market fund gives businesses a way to manage surplus cash while keeping the money in short-term investments. In this article, you’ll learn how money market funds work and what can affect the value of an investment before you put money into one.

Contents

What Is a Money Market Fund?

A money market fund is a mutual fund that invests in short-term debt instruments, such as government bills, bank deposits and other high-quality securities. Investors buy shares in it, and the fund manager puts that money into these short-term assets. The fund’s return comes from the interest and other income generated by those investments.

For example, a company may need €50,000 in three months but have no immediate use for it. It could move part of it into a money market fund, earn income and keep track of the money through its bank statements.

Business account with online accounting

What Are the Pros and Cons of Money Market Funds?

Pros:

  • You get access to short-term investments without buying individual debt securities.
  • You can earn income from the assets in the fund.
  • Fund shares can usually be redeemed relatively quickly.
  • Funds spread investments across several short-term assets.

Cons:

  • Returns can change as interest rates and market conditions evolve.
  • Your initial investment isn’t guaranteed.
  • Fund management and other operating fees reduce the return you receive.
  • Some funds may charge fees or limit withdrawals in certain market conditions.

Money Market Funds vs Savings Accounts and Fixed-Term Deposits

For businesses deciding where to keep surplus cash, the main differences are the return, access to the money, fees and protection. Savings accounts and fixed-term deposits are held by banks. By contrast, money market funds are investments, so they come with different rules and risks.

FeatureMoney market fundSavings accountFixed-term deposit
ReturnsVariable, based on fund performanceVariable, based on the bank’s interest rateFixed
FeesFund fees may applyOften low or noneOften low or none
AccessFlexibleFlexibleLimited during the fixed term
Capital protectionInvestment value can rise or fallDeposit protection may applyDeposit protection may apply

To determine which option could be best for your surplus funds, look at the rate you would receive over the entire investment period. The examples below are based on €10,000 and typical rates that may be available:

  • Fixed deposit: €68.75 at 2.75% for 3 months | €150 at 3% for 6 months.
  • Savings account: €100 at 4% for 3 months | €137.50 over 6 months, as the rate drops to 1.5% after the promotion.
  • Money market fund: €100 at 4% for 3 months | €200 at 4% for 6 months, with the yield able to rise or fall with market rates.
Discover AI Accounting

How Do Money Market Funds Differ Across Regions?

MMF rules generally aim to spread investment risk and keep enough liquid assets in the fund to handle withdrawals. The exact requirements vary by jurisdiction. For example:

  • EU: Certain types of EU MMFs must hold at least 10% of their assets in daily maturing assets and 30% in weekly maturing assets. Rules also limit exposure to a single issuer or bank.
  • US: MMFs, commonly denominated in USD, must hold at least 25% of their assets in daily liquid assets and 50% in weekly liquid assets.
  • UK: For GBP-denominated MMFs, the FCA proposes that stable-NAV MMFs hold 40% of their assets in weekly liquid assets, compared with 20% for variable-NAV funds.

The relevant benchmark also depends on the fund’s market and currency. Euro-denominated funds may reference €STR, while SOFR is a key benchmark for USD markets and SONIA for GBP markets. An MMF should only be compared with a benchmark it actually states it tracks or uses.

Protection works differently, too. Money market funds are investments, so they don’t have the same deposit insurance that applies to eligible bank deposits. Instead, investors own units in the fund, which are protected as they are held separately from the provider’s own assets. 

This is why some businesses look at local cash alternatives. In Germany, the tax treatment of MMF income depends on the business’s legal form. Tagesgeld and Festgeld are common local bank deposit options.

Managing Surplus Business Cash with Finom

Finom gives businesses several ways to manage funds they do not need for day-to-day spending. The Investment Account allows them to invest company funds directly from their business accounts. They can keep track of the investment alongside their regular business finances and access the funds when needed. Returns vary with the money market fund’s performance. 

The Interest Account is another option if you want to earn money with a 5% interest rate on EUR funds. You get a fixed 5% p.a. for the first five months, followed by a rate of up to 2.25% p.a., depending on your pricing plan. The account has no minimum deposit, interest is calculated daily and funds can be withdrawn at any time.

Either way, you invest in money market funds, with different options depending on how you prefer to allocate your money.

FAQ

Can a money market fund generate a negative return?

Yes. The fund’s return depends on the securities it holds and their prices and income after fees have been deducted. In some market conditions, the return can fall below zero.

How much will €10,000 make in a money market fund?

It depends on the fund’s return over the period you hold it. For example, if a fund has a 4% annual net return, €10,000 would generate about €400 over one year, before any taxes that apply to you. Actual returns can change.

Is a money market fund better than a fixed deposit?

Neither is always better. A fixed deposit offers a set rate for a set term, which is easier to plan around. A money market fund has a variable return, but may provide more flexible access to funds. Each may be suitable for different circumstances.

You may also find these articles helpful:

Last articles