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Published on April 1, 2008

But being smart investors, we should understand the nature of money-market funds and the risks related to them, before we jump on the bandwagon.

By definition, a money-market fund is an open-ended mutual fund that invests only in money-market assets. These funds are short term in nature, from one day up to one year, and are invested in debt obligations such as treasury bills, certificates of deposit and commercial paper and deposits. Their main goal is the preservation of principal accompanied by modest dividends.

In Thailand, money-market funds on offer include both open-ended funds with daily redemption and open-ended funds with auto redemption at three to 12 months. Underlying assets include treasury bills, government and state-enterprise bonds, certificates of deposit, commercial bank deposits and both onshore and offshore commercial paper. Owing to the liquid nature and relatively low risk of the funds, investors use daily-redemption money-market funds to store money that is not currently invested.

Open-ended money-market funds with auto redemption have often been compared with time-deposit accounts of a similar tenor. However, there can be no simple comparison based only on returns because money-market funds and time deposits involve different risks. Unlike deposits, money-market funds are not insured by the Financial Institutions Development Fund. Although they are among the safest types of mutual funds, it is still possible for money-market funds to fail if the issuers of commercial paper either refuse to repay principal and interest, or are unable to do so.

Unlike bank deposits, open-ended money-market funds with auto redemption have a risk that they may not be able to sell securities by a desired time and at a desired price. Therefore, investors must be sure that they do not require their money before auto redemption is scheduled.

In fact, the biggest risk involved in investing in money-market funds is that inflation will outpace the funds' returns, thereby eroding the purchasing power of the investor's money. There is also a risk specific to money-market funds that invest in offshore assets that may be related to fluctuations in exchange rates.

In conclusion, money-market funds have relatively low risks for investors. Once the nature of these funds is understood, as well as the risks they carry, then those that invest in treasury bills and government bonds may be an investment option for depositors who want the security of insurance when the Deposit Protection Institute Act is implemented.

Ratanachon Thanyodom is senior vice president for product management and business strategy in HSBC's Personal Financial Services Department in Thailand.

Ratanachon  Thanyodom

HSBC

The Nation