Cash & Liquidity Management
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The Instruments Purchased by a Money Market Fund

by The Institutional Money Market Funds Association

Money market funds invest in high quality short-term debt instruments. Although the restrictions imposed upon the funds do not tend to dictate the exact types of instruments which may be purchased, the broader investment universe for all money market funds is reasonably similar. An investor should understand the types of instruments which may be purchased by a money market fund, and also appreciate how risks can vary depending on the fund’s specific composition.

Let’s look at the key instruments in more detail, starting with the simpler ones:

A savings account held with a bank, which may be overnight or for a longer, and fixed, term. Fixed-term deposits can have a penalty applied if the investment is redeemed before the expiry of the term. This penalty is generally taken out through loss of interest paid to the investor.

Overnight deposits provide money market funds with natural liquidity. Each day, the fund has access to the cash held in the previous day’s deposits and can use this to meet any redemption requests. Cash remaining can be invested over a longer term, or may simply be rolled into another overnight deposit.