It is very interesting to note that in this world of money, we simply need to become aware of a lot of things lest we fall into the trap of bankruptcy. Let us now talk today about money market funds class. Well, certificates of deposit and Money Market Funds Class (MMF) fall within the same asset class. They both can be classified as Income Options – an asset class that offers moderate return with limited risk. The returns from these two products are both higher than returns from cash options and are less risky than growth options.
Indeed, money market funds are a type of mutual fund that use short-term debt instruments like bonds, debt securities and other money-based funds for investment. The objective of these funds is to insulate the investor from major financial risks while providing a better hedge against inflation.
Furthermore, the objective of Certificates of Deposit is to attract funds for a specific period for use by a financial institution. These funds would normally have a fixed, guaranteed interest rate with the capital assured as well (up to certain limits). The rates CDs offer differ based on different factors such as savings period and initial capital.
As CDs and MMFs belong to the same asset class, it is often necessary to choose one over the other. The choice of a financial product should be premised on your needs and circumstances. However, there are a few justifications for choosing money market funds over CDs.
Liquidity: Money market funds have far more liquidity than Certificates of Deposit. This does not suggest that you cannot retrieve money from a CD if you really need it though. CDs normally bear stiff withdrawal penalties for withdrawal before maturity. MMFs offer the investor the possibility to buy and sell shares daily, with no withdrawal fees.
Uncertainty over investment period: For short or medium term investment horizons, MMFs are better suited. Sometimes an investor needs to keep a certain amount of money fairly secure until it is needed by a certain period. He may not be certain exactly when it is required (the uncertainty could span months). In such circumstances, setting a time period for a CD is difficult, so the MMF is the safer option.
Emergency funds: Given the inherent nature of an emergency fund, a CD would be a poor financial instrument for it. Money market funds allow your emergency funds to at least maintain their real value while providing the requisite liquidity necessary.
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In conclusion, it is good to note that there are a few reasons to choose money market funds over CDs do not indicate that money market funds are better. With the economic downturn of 2008, money market fund yields have fallen while CD rates have generally remained stable. Based on their regulations, losses in the MMFs are rare, but technically, not impossible.What this suggests is that there could be a few reasons to choose Certificates of Deposit over MMFs as well. Still, if you are faced with investment-horizon uncertainty, selecting an emergency fund or need a balance between liquidity and returns; the MMF should prevail.
