Money Market funds - Risks

raghav.raman

Hello,

In the recent times some of the money market funds attracted significant inflows.

See,

- Royal London Short Term Money Market Y Acc

- Lyxor Smart Overnight Return - UCITS ETF C-GBP

With billions of assets under management what risks can arise? 

I do realise money market funds carry the lowest risk but is not risk free.

I am wondering if i should diversify to ultra short term bonds or short term Gilts.

Your observations and thoughts are gratefully received.

Many thanks

dunstonh

Are you referring to STMMs or MMs? -  the risks are different.
STMMs have reduced risk.  MMs have increased risk.

Liquidity risk is the key issue.   MMs have assets with longer redemptions and in the case of significant withdrawals, the fund may have to suspend trading.

Some MMs have assets that may not be a capital secure as you may think.

raghav.raman

Sorry I should have been clearer.
I am referring to Short term money market funds.

masonic

Risks are pretty minimal, but YTM on gilts are looking quite attractive and a rolling ladder could be worth a look. Both of these leave you with inflation risk, so index linked gilts could be worth considering too (obv short dated also).

I will be winding down my small holding of CSH2 as opportunities present further down the yield curve.

InvesterJones

https://www.youtube.com/watch?v=Okv7EZL0dhc

Eyeful

1. Anything to do with money has risk attached, its just the size and type of risk that changes. Nothing is risk free!
https://monevator.com/money-market-funds/
https://portfolio-adviser.com/calastone-the-future-of-money-market-funds/

If you chose other than UK Gilts, there will be currency risk attached.

How much money are we talking about?
How long will the money stay there?
What other assets do you have in your portfolio?
How much knowledge & experience have you to go it alone in bonds & gilts?

Bond Ratings:

BBB & Upwards = Investment Grade Bonds (i.e. good companies)

BB & downwards = Junk Bonds ( i.e. dodgy companies) 

Investment Grade Bond Fund = Governments & companies who are expected to repay .

High Yield Bond Fund = Junk Bonds, may not repay loans or interest on bond.

2. What makes you think that your choice of bond or gilt will be better than the MMF?

3.  If you are very worried, why not convert it into cash & stick it in to  a savings account protected by the FSCS? 

artyboy

As CSH2 (Lyxor) was mentioned, bear in mind that it's a swap based synthetic STMM ETF (which also means no FSCS protection). So there are risk factors that the 'traditional' RL fund doesn't have.

That said, I've got a chunk invested in CSH2 and still consider it very low risk overall.

aroominyork

artyboy said:

That said, I've got a chunk invested in CSH2 and still consider it very low risk overall.

Me too, but since CGT increased from 10% to 18% its benefits over, say, the Royal London fund have narrowed.

raghav.raman

masonic said:

Risks are pretty minimal, but YTM on gilts are looking quite attractive and a rolling ladder could be worth a look. Both of these leave you with inflation risk, so index linked gilts could be worth considering too (obv short dated also).

I will be winding down my small holding of CSH2 as opportunities present further down the yield curve.

Thank you.
Are you able to point me to short dated index linked gilts?

raghav.raman

Eyeful said:

1. Anything to do with money has risk attached, its just the size and type of risk that changes. Nothing is risk free!

If you chose other than UK Gilts, there will be currency risk attached.

How much money are we talking about?
How long will the money stay there?
What other assets do you have in your portfolio?
How much knowledge & experience have you to go it alone in bonds & gilts?

Bond Ratings:

BBB & Upwards = Investment Grade Bonds (i.e. good companies)

BB & downwards = Junk Bonds ( i.e. dodgy companies) 

Investment Grade Bond Fund = Governments & companies who are expected to repay .

High Yield Bond Fund = Junk Bonds, may not repay loans or interest on bond.

2. What makes you think that your choice of bond or gilt will be better than the MMF?

3.  If you are very worried, why not convert it into cash & stick it in to  a savings account protected by the FSCS? 

Thank you.


I have about 20% of my portfolio in CSH2 as dry powder.
Equity valuations are quite stretched at the moment. I realise it is not stretched every where however for simplicity i am sticking to one global tracker fund.
I also realise i shouldn't try and time the market but all my reading highlights the risks of high valuations and the unknowns arising out of the new regime.
Equities and Bonds are the only asset types in my portfolio, at the moment 70% in Equities, 10% in Bonds and 20% in short term MMF .

I consider myself an average when it comes to bonds and gilts.

I considered moving some of my cash in CSH2 to ERNS (Ultrashort bonds) to diversify. I have not done this yet.
In December i moved some from CSH2 to Royal London Short term MMF.

I don't want to take money out of the ISA account. MMFs are offering a better return than Cash ISA. Also i will not be locked in with MMFs and can get back to Equities quickly.

Ciprico

aroominyork said:

artyboy said:

That said, I've got a chunk invested in CSH2 and still consider it very low risk overall.

Me too, but since CGT increased from 10% to 18% its benefits over, say, the Royal London fund have narrowed.

Is CSH2 growth entirely capital gains...? I have tried to find out previously but couldn't find a decisive answer, so shied away from it in gia acct in favour for low coupon gilts...