Are money market funds an attractive investment?

What are money market funds?

Money market funds or monetary funds invest primarily in short-term investments that pay a fixed rate of interest. Examples include high-quality bonds with a short (remaining) term, government bonds and fixed-term deposits. As a result, money market funds are low-risk investment products that nevertheless offer a reliable return. Money market funds are typically very liquid. You can buy and sell these investments on a daily basis, making them easy to trade. This is not always the case with other products that generate a fixed rate of interest. One example is term deposit accounts where your money is blocked for a certain period. Money market funds can be purchased in the form of passive trackers or actively managed funds. In the case of a tracker, a specific index is tracked. In the case of actively managed funds, the fund manager attempts to beat the market and achieve a higher return by selecting investments.

Why have money market funds become popular again?

When central banks raise interest rates, it takes a while before the higher interest rates feed through to classic savings accounts. In addition, banks can choose how much they want to raise interest rates on savings accounts. The interest you receive on a savings account is therefore generally much lower than the reference rate. A money market fund is different, with interest rate hikes flowing through to them much faster. This is because money market funds invest in short-term paper and so have to reinvest on an ongoing basis. In the wake of the 2008 crisis, the popularity of money market funds plummeted because interest rates were low, even negative. Now that interest rates are higher, however, investors are coming back to them. In 2023, these products actually saw a record influx. In the UK, investors pumped even more money into these funds than during the previous eight years put together (2015–2022).

What are the disadvantages?

According to figures from BEAMA (the Belgian Asset Manager Association), barely 2% of the assets actively managed by Belgian investors are placed in money market funds. It is no coincidence that we Belgians do not invest much in these products. Investors pay 30% tax on both the interest received and any capital gains realised. This tax applies to both variants: distribution (pays out interest) and capitalisation (reinvests interest). By way of comparison, for an ordinary regulated savings account, the first EUR 1,020 in interest is tax exempt (withholding tax); with a term deposit account, you will pay 30% withholding tax on all the interest.

Most money market funds also charge between 0.05 and 0.7 per cent in current costs per year. This is calculated into the daily price. For most trackers, the costs are near the bottom of this range; for actively managed funds, they are near the top. Some funds also charge an entry fee (with Keytrade Bank, you do not pay anything in entry fees on an actively managed fund). If you buy or sell trackers, you also pay transaction fees and stock market tax (0.12% or 1.32% stock market tax, depending on whether the tracker is registered in Belgium and pays out interest or not). At Keytrade Bank, the cost depends on the amount invested and which market the tracker is listed on. Another disadvantage is that money market funds are not covered by the deposit guarantee scheme. If a bank should go bankrupt, savers receive a refund of up to EUR 100,000 per person and per bank. This guarantee applies to current accounts, savings accounts and term deposit accounts. Although money market funds are considered low-risk investments, you do not have this safety net. On the other hand, this does not mean your investments are entirely unprotected. Financial instruments such as trackers and funds remain the property of the customer at all times. Even if a bank goes bankrupt, they are set apart from the bank’s assets and cannot be claimed by creditors.

Are they worth the money?

On the one hand, they offer a more attractive return than a savings account. On the other hand, you have to factor in the unattractive taxation and costs. To determine whether the game is worth the candle, you need to get out your calculator. Current returns for money market funds in euro have fluctuated between approx. 3.7 and 4% in recent months (as of February 2024). And after you deduct the 30% tax, transaction costs and stock market tax from this? You may still be left with a return that can compete with your savings account(s). Of course, you should not forget that money market funds carry a slightly higher risk and are therefore not savings products. Many investors do not use money market funds because they are looking to generate generous returns. They are more likely to use them as a vehicle to temporarily store their (excess) cash, for example when there are no other investment opportunities that appeal to them, or when they are looking for a safe haven when the markets are turbulent. However, money market funds can also be an interesting investment for (very) defensive investors, especially as part of a diversified portfolio.

How to invest in money market funds

• Log in to Keytradebank.be on your laptop or desktop
• Click on Advanced at the top of the screen, then ask to search by instrument name, symbol or ISIN
• Tick Tracker and/or Fund
• Search for Cash, Overnight and/or Ultrashort Bond