MANILA, Philippines - If you are the type of person who browses through the world-wide-web for investing tips, you probably have had your fill on this phrase: “Save for the Long-term!” Investment gurus like Warren Buffet have said this many times over. Ever heard anyone say he’s (Buffet) wrong?
So why do fund houses come up with money market funds at all?
For those who are not yet in the know, a money market fund is a short-term investment fund with a portfolio of fixed-income instruments (debt instruments) that mature in less than one year. A well-structured, well-managed money market fund should outperform short-term deposit rates with very minimal or almost negligible volatility.
This type of fund is for people whose aim is to preserve capital but are looking to make a little extra income on their disposable funds.
Why would you need a money market fund if you have long-term financial goals? Well, because you have a life to live today and that, unfortunately, has a price tag.
Here are four practical applications for money market funds:
• Parking: If you are among the privileged few that can effectively manage your own investment portfolio, a money market fund can be a good safe-house when the markets go bad. You can sell your long-term bonds or stocks and still generate some returns by investing in a short-term fund. When the time comes for you to reinvest, it will be very easy to get your assets out of your money market fund and back in action.
• Emergency Funds: A critical ingredient in any investment portfolio is the money you set aside for emergencies (around six months worth of your monthly household expenses). An emergency fund is important because it shields your long-term investments from a fire sale in case you suddenly need a large amount of cash. For this purpose, the liquidity and stability of the investment vehicle is a critical feature, and money market funds can offer both with that little extra “oomph.”
• Piggy Banking: Most of us have those easily-taken-for-granted-activities that make our lives more meaningful. A family vacation, a birthday party, or perhaps that beautiful, shiny, top-of-the-line, state-of-the-art, first-ever, second-hand-car that you’ve always dreamed of. You are probably trying to save up for one right now. Unfortunately, with the small amounts that you can set aside monthly, the best that you can do is to put the money in your savings account. By putting your money in your savings account, you are risking the possibility of unwittingly (hopefully not uncontrollably) spending your savings on some other things that may catch your fancy today. A money market fund is a better alternative because you won’t need huge amounts to open and add to your account, and getting hold of the money will not be as easy as going to an ATM machine. This application also works if you are saving for next semester’s tuition fees, your next insurance premium or other relevant expenses that are due within the year.
• Cash-flow management: If you are a retired individual, your main concern is to be able to stretch your retirement fund as long as you can so that it outlives you. A money market fund (combined with a bond fund) can help you do this because it can generate that extra income for your short-term funds. If you operate a business where revenues come in bulk at certain months of the year, you will need to manage your operational funds so that you can stay within your annual budget. A typical example of this type of business is a school. Schools get most of their revenues during enrollment. School operators need to spread out their funds over the current semester or school year so that they do not over spend. Spreading too thinly (investing too long) can be disastrous to a school’s budget. On the other hand, investing to short (30 or 60 day placements) results to very low returns. A money market fund does not have maturity periods and therefore can provide liquidity at any given moment. However, because of the diversified portfolio of the fund, it can generate yields higher than the typical short-term placements.
There are many situations when money market funds can come in handy. The rule of thumb is if you are saving for something that you will need in a year or sooner, go for a money market fund. – Hector de Leon, www.save-and-learn.com