Money market fund risks (2024)

Money market fund risks (1)

Interest rate risk

Interest rate risk measures the impact of changes in rates on the securities held by money market funds.

If interest rates increase, the value of a money market fund’s investments generally declines, and vice versa. Securities with longer maturities typically offer higher yields, but have greater interest rate sensitivity.

Usually, changes in the value of fixed income securities will not affect cash income but may affect the value of an investment in the fund.

Weighted average maturity (WAM) and duration measure the sensitivity of a bond’s price to changes in interest rates. The interest rate risk of a fund can be mitigated by limiting the maximum WAM or duration of the product.

Money market fund risks (2)

Liquidity risk

Liquidity risk can result from market volatility or from a lack of liquidity in underlying securities held by a fund.

Mitigating liquidity risk is most important for money market funds because they are meant to be used for daily cash needs.

There are two main types of liquidity risks faced by money market funds: funding liquidity risk (if the fund’s liquidity is insufficient to meet redemptions) and market liquidity risk (if market volatility forces funds to sell securities below the mark-to-market price in order to meet large redemptions or maintain regulatory limits).

To minimise funding liquidity risk, funds can maintain high overnight cash balances, build a strong ladder of maturities and institute cautious concentration limits to create a diversified investor base.

The latest regulations and rating requirements typically specify minimum requirements for daily liquid assets (DLA) and weekly liquid assets (WLA). Fund managers will typically hold higher DLA and WLA to provide an additional cushion against unexpected outflows.

Market liquidity risk can be mitigated by holding smaller concentrations of each issue with diversified maturities — particularly for less liquid securities — which can help minimise the impact of security price volatility. Money market funds typically pursue a buy-and-hold investment strategy, which can help them weather market liquidity risk, as securities mature at par. Maintaining strong broker relationships can also help ensure liquidity is maintained.

Money market fund risks (3)

Credit risk

Credit risk measures the likelihood that issuers or counterparties will default or be downgraded.

Default risk is the failure to repay on securities, time deposits or repurchase agreements. Downgrade risk is the risk that the credit rating of a security or issuer may be reduced by a credit rating agency.

An increase in credit risk can lead to greater volatility in the price of the security, thereby impacting the value of the fund. A money market fund may also become a forced seller, because the security no longer meets regulatory or rating agency rules — while at the same time, the reduced rating may affect the security’s liquidity, making it more difficult for the fund to sell it.

Credit risk can be mitigated through the use of external or internal credit research, designed to monitor the credit quality of the issuer or counterparty. Credit rating agencies, either international or domestic, publish credit ratings that are an opinion on the default risk of a particular bond or issuer. Rating agencies also signal the likely future path of credit ratings with a “rating outlook” for the next six to 24 months and a “rating watch” for a three-month time horizon.

Rating agencies generally need to consider multiple factors and parties before taking rating action, which may limit their effectiveness. Therefore, a comprehensive, internal credit analysis process and credit risk management framework, that is integrated with a money market fund’s portfolio management, can minimise the risk of suffering unanticipated downgrades or defaults.

Money market fund risks (2024)


Money market fund risks? ›

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

What are 3 cons of a money market account? ›

Disadvantages of money market accounts
  • Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
  • Deposit and balance requirements. ...
  • Fees. ...
  • High interest rates. ...
  • Flexible access. ...
  • Federal insurance.
Mar 18, 2024

Are money market funds safe in a recession? ›

Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.

Are money market funds zero risk? ›

A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.

Are money market funds guaranteed? ›

Money market mutual funds, like bond and stock mutual funds, are investments, and, as such, are not guaranteed. It is important that investors understand that.

What is bad about a money market account? ›

Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.

Why is a money market account bad? ›

Your Financial Institution May Limit Convenient Withdrawals

One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month.

Has anyone ever lost money in a money market fund? ›

However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.

What happens to money market if stock market crashes? ›

Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.

Can I lose my 401k if the market crashes? ›

The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.

Why would you not invest in a money market fund? ›

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

What is the biggest disadvantage of money market? ›

Cons of money market accounts
  1. Depending on your bank, there could be withdrawal limits. Many banks have withdrawal limits on how much you can withdraw from your money market account and how often. ...
  2. Many accounts have monthly fees. ...
  3. Your account might have a minimum balance requirement.

What are two disadvantages of a money market fund? ›

Cons of Money Market Funds
  • Your Money Could Earn More Elsewhere. High-risk investments could provide better returns in the long run. ...
  • Your Funds Are Uninsured. If you open a CD or a checking, savings or money market account from a bank, your funds are FDIC-insured. ...
  • You Can Expect Fees.
Nov 14, 2023

Are money markets 100% safe? ›

The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.

Should I put all my money in a money market fund? ›

But generally, yes, it is worth having. Money market accounts offer a low-risk environment with a higher interest rate to grow your money. Money market accounts are insured by the FDIC and can help individuals reach their short-term savings goals.

What is the safest type of money market fund? ›

Vanguard Treasury Money Market Fund

This fund only invests in US Treasuries and repurchase agreements insured by the federal government, making it among the safest in a category of relatively safe investments. The weighted average maturity of the fund's holdings is 43 days.

How much will $10,000 make in a money market account? ›

Currently, money market funds pay between 4.47% and 4.87% in interest. With that, you can earn between $447 to $487 in interest on $10,000 each year. Certificates of deposit (CDs). CDs are offered by financial institutions for set periods of time.

How safe are money market accounts right now? ›

Are money market accounts safe? Yes, money market accounts are safe. The FDIC insured these products for up to $250,000 per depositor, per account ownership category. At credit unions, money market accounts receive the same level of protection from the NCUA.

What are the limitations of a money market account? ›

Money market accounts don't have time limits or terms. You can deposit or withdraw money from the account at any time, though there may be limits on how many withdrawals or transfers you can make in a single statement period.

What are the cons of money market instruments? ›

Cons. Although money market funds are typically regarded by most investors as relatively safe investments, it is possible to lose money by investing in such funds. They aren't FDIC insured, nor are they guaranteed by the U.S. government or a government agency.

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