Money market funds are a popular investment solution prized for their stability and low volatility. They are often used to grow and protect capital or corporate cash in the short term. Their returns were particularly low in the eurozone during the 2010-2020 decade due to the monetary policies in place, but they have become very attractive again since 2022.
Let's take a closer look at how they work, their return prospects and possible alternatives.
What is a Money Market Fund?
A money market fund is an investment fund primarily composed of short-term debt securities issued by governments (treasury bills), banks (certificates of deposit), or companies (commercial papers). It provides daily liquidity, stability of invested capital, and daily interest.
These funds primarily exist as UCITS (Undertakings for Collective Investment in Transferable Securities) or AIFs (Alternative Investment Funds) and are managed by professionals approved by a national competent authority. In France, this is the Financial Markets Authority or AMF. They allow individuals, companies, and certain financial institutions to access the money market without necessarily having to invest excessively large amounts.
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Operation and Benchmark Indices
The return of money market funds is directly impacted by the central bank's key interest rates. In euros, this is the European Central Bank or ECB. The main benchmark indices in Europe are:
- €STR (Euro Short-Term Rate): Calculated daily by the ECB, it reflects the cost of short-term financing in the eurozone.
- Euribor: Indicator of interbank rates at different maturities (from one week to one year).
Money market funds: For whom and why?
Money market funds are particularly suitable for short-term investments (less than 3 years) or while waiting for more profitable investment opportunities. Unlike stocks or bonds, they have little or no exposure to market fluctuations, such as risk appetite or interest rate variations.
In a context of high short-term interest rates, maintained in Europe since the rise in inflation in late 2021 - early 2022, this investment solution has become particularly popular among individuals and companies.
Alternatives to Money Market Funds
For investors with a longer investment horizon (from 2-3 years onwards), other solutions may offer better return potential:
- Equity funds: On average 5-8% annual return, but with high volatility.
- Bond or diversified funds: Often less risky than stocks, they may be suitable for intermediate investments (3 to 5 years).
Conclusion
Money market funds represent an ideal investment solution for short-term investments. They are particularly suitable for corporate treasurers wishing to preserve their capital while generating interest, as well as savers and investors who want to grow their savings with minimal risk.
For a customized investment strategy, a wealth management advisor can assist you in optimizing the allocation of your capital between money market funds, bond funds, equity funds, and real estate.
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