Money market funds

A money market fund pools cash from many savers and invests it in short-term, low-risk instruments. In Nigeria, these instruments include treasury bills and similar debt issued by borrowers with strong credit standing. The fund aims to keep the value of each unit steady while paying income over time.

What a money market fund holds

A money market fund buys short-term debt. The main holdings are treasury bills, which are short-dated government securities sold at a discount and repaid at face value. The fund may also hold commercial paper, certificates of deposit and other short-term instruments from issuers with strong credit quality.

The fund keeps its holdings short in maturity. That means the assets are always close to being repaid and replaced with new ones. This constant turnover is what makes the fund a place for cash that may be needed soon rather than for long-term growth.

The fund holds many instruments rather than just one. Spreading holdings across different issuers and maturity dates reduces the effect of any single borrower running into trouble. The fund manager watches the mix and adjusts it as market conditions change.

How income builds up and how it differs from a bank savings account

Income builds up in the fund as the instruments it holds pay interest or mature at a value above their purchase price. The fund collects this income and passes it to unit holders, usually by adding to the value of their units or by paying out distributions. Over time the value of a holding can grow through this income, not through a fixed promise.

A bank savings account is a deposit with a bank. A money market fund is not a deposit and is not insured by any deposit protection scheme. If the instruments held by the fund fall in value or an issuer fails to pay, the fund can lose value. This is rare for funds that hold short-dated government paper, but it is possible.

A savings account usually pays a stated rate set by the bank. A money market fund has no fixed rate. Its return depends on the yields available on the instruments it holds and on the fund's costs. The value of a unit can move down as well as up, although the short maturity of the holdings tends to keep such moves small.