What's the risk with Money Market funds?

hallmark

Very basic question but not seen a definitive answer.

I understand MM funds are a low-risk place to park cash & earn currently 4.x%. However I also understand they're low-risk not no-risk.

What actually is the risk though?  And for example, is the risk contained (i.e. there's a low risk of a 1% loss but none whatsoever of a 20% loss?)

Or is there a risk of reasonable losses, even if that risk is infinitessimily small?

thanks

Mr_blibby

hallmark said:

Very basic question but not seen a definitive answer.

I understand MM funds are a low-risk place to park cash & earn currently 4.x%. However I also understand they're low-risk not no-risk.

What actually is the risk though?  And for example, is the risk contained (i.e. there's a low risk of a 1% loss but none whatsoever of a 20% loss?)

Or is there a risk of reasonable losses, even if that risk is infinitessimily small?

thanks

What are money market funds? - Monevator good article here

Malthusian

Threadneedle's money market fund fell 20% in 2008-2009 (and was wound up) because it was actually invested in toxic mortgage debt rather than cash. Standard Life's cash fund fell 5% and Standard Life had to put their own money in to reverse the loss. (As far as I can tell, Threadneedle investors just had to swallow it.)
But that was then. In theory, a 20% loss in money market funds now would require major governments to default on their debts, or a collapse of the banking system so bad that banks were unable to repay short term loan notes, or more likely both (as one would go with the other). That is almost an apocalypse scenario (i.e. you wouldn't fare any better if you had your cash in a conventional deposit account). 
Or if the fund managers screw up again as Threadneedle's and Standard Life's did. You can mitigate that risk by checking the fund's holdings and making sure the cash fund actually holds cash.

InvesterJones

hallmark said:

What actually is the risk though?  And for example, is the risk contained (i.e. there's a low risk of a 1% loss but none whatsoever of a 20% loss?)

There is a (albeit small) risk of losing 100% of your capital, it's not contained nor protected.

dunstonh

STMMs have lower risk than MMs.  So, you can reduce the risk by getting the right type.

hallmark

Thanks for those replies, very useful.

Specifically I was considering these (as I have some cash in a Vanguard SIPP and an AJ Bell SIPP):

Vanguard Sterling Short-Term Money Market Fund

LYXOR SMART CASH (CSH2)

Doctor_Who

I've parked some cash in my SIPP in Royal London Short Term Money Market Y Acc. I won't need it until at least the end of this tax year, when I know what other income I have. Interactive Investor pay 1.5% for cash up to £10K, but hopefully a STMMF will beat this.

Bravepants

If your MMF tracks SONIA, you can see the latest rate here:

https://www.global-rates.com/en/interest-rates/sonia/sonia.aspx

Currently 4.42%

adindas

This is another article regarding MMF

https://www.cnbc.com/2016/02/24/beware-you-may-lose-cash-in-your-money-market-fund.html

My personal opinion the obvious the risks of MMF, especially if the large percentage of your money is investing in this sort of asset Is

Being an ignorant thinking, it is a safe heaven investment, without comparing it with other risk free alternatives outthere that is accessible to you.

If your aim is to grow your money another obvious risk is to follow advice from random people on the internet, who is yet to prove successfully applying their own strategy they have been telling to other people, ignoring the view from proven billionaires investors.

Forgetting that from the name suggest, investing is for a long term, to grow your initial investment. 

Those who think this is a good strategy, please provide hard evidence, from a well known proven investors or from people own investment journeys not from useless argument from random people on the internet.

Adyinvestment

adindas said:

This is another article regarding MMF

https://www.cnbc.com/2016/02/24/beware-you-may-lose-cash-in-your-money-market-fund.html

My personal opinion the obvious the risks of MMF, especially if the large percentage of your money is investing in this sort of asset Is

Being an ignorant thinking, it is a safe heaven investment, without comparing it with other risk free alternatives outthere that is accessible to you.

If your aim is to grow your money another obvious risk is to follow advice from random people on the internet, who is yet to prove successfully applying their own strategy they have been telling to other people, ignoring the view from proven billionaires investors.

Forgetting that from the name suggest investing is for a long term, if the aim is  to generate cash-flow, it is not investing.

That article and chart is over 7 years old, and not relevant at this totally different time.

dunstonh

adindas said:

This is another article regarding MMF

https://www.cnbc.com/2016/02/24/beware-you-may-lose-cash-in-your-money-market-fund.html

My personal opinion the obvious the risks of MMF, especially if the large percentage of your money is investing in this sort of asset Is

Being an ignorant thinking, it is a safe heaven investment, without comparing it with other risk free alternatives outthere that is accessible to you.

If your aim is to grow your money another obvious risk is to follow advice from random people on the internet, who is yet to prove successfully applying their own strategy they have been telling to other people, ignoring the view from proven billionaires investors.

Forgetting that from the name suggest, investing is for a long term, to grow your initial investment, not intended as a source of regular income, to generate secure cash-flow.

So, a chart looking exactly how you would expect it to look as interest rates fell and stayed low in that period.